NCPA - National Center for Policy Analysis

Soaring Drug Costs

November 16, 1998

A revolution in pharmaceutical research and popular, pricey new prescription drug treatments are driving spending for medical drugs in the U.S. to record-high levels, say observers. The trend is raising costs for employer-sponsored health plans and government health programs, and will make it more difficult for the uninsured and Medicare patients without supplemental insurance, who must pay for their own drugs or forego treatment.

The figures show the magnitude of the surge in drug costs:

  • Drug sales in the U.S. are rising 16.6 percent this year, more than four times the increase in health care spending overall.
  • Retail pharmacies will rack up an estimate $102.5 billion in sales of prescription drugs by year end, up 85 percent in just half a decade.
  • Some generic drug makers have raised the prices of many medications by 10 percent or more in the past year.
  • Meanwhile, prices of other manufactured goods have declined by 1 percent.

At Blue Cross Blue Shield of Michigan, for example, drug outlays now represent 28 percent of total expenditures -- more than the amount spent by the health plan on doctor visits. And in California, MediCal, the state Medicaid program for the poor, is expected to run 10 percent over its $1.4 billion pharmaceutical budget for the year.

The increasing ranks of the elderly are major factor in the growing demand for drugs. The ranks of people over age 65 is expected to double to about 70 million by the year 2030 and will then account for 20 percent of the U.S. population. On average, people over 65 fill between nine and 12 prescriptions a year, compared with two or three for people between the ages of 24 and 44.

Profits for U.S. drug makers are expected to grow 16 percent to 18 percent a year for the next four years, far outpacing the 4 percent to 7 percent growth forecast for the nation's top 500 companies. While prices of some drugs are rising sharply, higher prices account for only 3.2 percentage points of the 16.6 percent increase in drug spending this year, according to IMS Health Inc. New drugs and higher volumes are other major factors.

America is virtually alone among major industrial countries in forgoing price controls on drug prices. As a result, say observers, U.S. companies lead the world in new drug development. U.S. companies produced almost half of the new drugs introduced around the world between 1975 and 1994, according to the Pharmaceutical Research and Manufacturers of America (PhRMA).

The industry cites the benefits of drug treatment. For instance, a 1991 study showed that when New Hampshire restricted the number of prescriptions reimbursed by Medicaid, drug use in the program declined by 35 percent, but admissions to nursing homes rose 80 percent; then returned to normal levels when the restrictions were lifted.

Source: Elyse Tanouye, "U.S. Has Developed an Expensive Habit; Now, How to Pay for It?" Wall Street Journal, November 16, 1998.


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