NCPA - National Center for Policy Analysis

Economist Says Drug Spending Not A Crisis

April 6, 2001

Those who are warning that the recent spiraling spending on prescription drugs is threatening to bring down the nation's health system should relax, Princeton University economist Uwe Reinhardt recently told a meeting on prescription drug pricing issues. "In the aggregate, spending on prescription drugs is not a major macro-economic burden," Reinhardt told a meeting of the Council on the Economic Impact of Health System Change.

  • In 1999, he noted, Americans spent less per capita on prescription drugs ($358) than they did on alcohol, tobacco and entertainment admission fees ($413).
  • Increased spending for prescription drugs is overrated as a reason for the recent upsurge in health insurance premiums, since, if prescription drugs account for 15 percent of the cost of premiums and premiums are rising 20 percent per year, only 3 percentage points of the increase is attributable to prescription drugs, he said.
  • And those who say that drug spending can be held down by lowering the industry's profit margin are also likely to be disappointed, since industry profits represent only about 1.2 percent of national health expenditures.

What is a major spur towards increased utilization, Reinhardt said, is the increase in third-party coverage of drug costs and tier pricing systems that shield consumers from the actual costs of their medications. Requiring people to pay a percentage of their drugs costs, rather than a fixed copayment, he said, would "give people some idea of the actual cost of drugs."

Source: "Economist says drug spending not a crisis," Reuters Health, March 28, 2001.


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