NCPA - National Center for Policy Analysis

Increased Utilization Is Driving Prescription Drug Costs

December 3, 1999

Increasing use of prescription drugs is driving the rapid rise in overall prescription drug costs, says Tom Tomczyk, of William M. Mercer Inc. Drug utilization has increased mainly due to managed care health plans, which usually include drug benefits; new drugs that have been developed for just about every condition, and direct-to-consumer advertising of prescription drugs.

In 1990, Tomczyk says, less than $100 million was spent to advertise 10 drugs, whereas in 1999, he estimates, manufacturers will spent $1.8 billion to advertise more than 100 drugs.

The other major factors increasing drug costs are inflation and more expensive new drugs replacing older, less costly ones. For example, the popular allergy drug Claritin had an average wholesale price of $2.50 per day in 1998, whereas the drug it replaced cost only 25 cents a day.

  • From 12 percent to 20 percent of an employer's health care dollar is spent on prescription drugs, says Tomczyk.
  • The cost of drug benefits is increasing at a rate of more than 20 percent a year, especially for health plans that cover retirees as well as current employees.
  • Mercer Inc. estimates that the net prescription drug cost per employee for employer-sponsored health plans to cover retirees in 2000 could be more than double the cost for current employees.

Because of increased costs, some of the 30 percent of employers that provide coverage for retirees are expected to drop such coverage.

Source: "Actuaries Cite Reasons for High Drug Prices; Contemplate Drug Benefit Designs for Seniors," BNA's Health Care Policy Report, November 22, 1999.


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