Advances in pharmaceutical treatments have transformed health care over the last several decades. Today, many health problems are prevented, cured, or managed effectively for years through the use of prescription drugs. In some cases, the use of prescription medicines keeps people from needing other expensive health care interventions, such as hospitalization or surgery. In 2010, 90% of seniors and 57% of non-elderly adults had a prescription drug expense . Additionally, the number of medicines being prescribed has increased: from 1999 to 2011, the number of prescriptions rose 43% (from 2.8 billion to 4 billion), outpacing U.S. population growth of 9%. Although still only a modest part of total health care spending in the U.S (10%), with so many people relying on prescriptions, the cost implications loom large for the American public, health insurers, and government payers.
Costs of Prescription Medications
Manufacturing and development of new drugs and patent protection laws are two of the major factors that influence drug spending. Drug manufacturers increase drugs costs to try to recoup the often significant outlays in research and development costs for drugs that make it to the market as well as those that do not enter the marketplace. Additionally, drug manufacturers make substantial investments in marketing practices, to influence physician prescribing habits and consumer demand for newer more expensive drugs. Furthermore, patent protection laws provide manufacturers an exclusive right to sell a new drug product for up to 20 years, after which the drug may be manufactured in generic versions by other manufacturers, lowering the selling price.
Spending in the U.S. for prescription drugs was $259.1 billion in 2010, and is projected to double over the next decade. The current rate of growth has slowed from the highs of the 1990s and early 2000s to a more modest rate, but is expected to increase sharply in 2014 after the implementation of the Affordable Care Act (ACA). (Figure 1) The recent slowdown in spending growth is attributable to a number of factors including slower growth in the utilization of drugs, increased use of generic drugs which cost less, the loss of patent protection for brand-name drugs such as Lipitor and Plavix, an increase in Medicaid prescription drug rebates, and a decrease in the number of new drugs introduced.
National Health Expenditures, Average Annual Growth from Prior Year Shown,
Selected Calendar Years 2009- 2021
Note: 2000-2009 shows average annual growth in that period.
Source: Keehan, SP et al. 2012. National Health Expenditure Projections: Modest Annual Growth Until Coverage Expands and Economic Growth Accelerates. Health Affairs 31(7), Exhibit 2. Online.
Public and Private Spending on Drugs
Historically, private plans and public insurers have responded to rising prescription drug costs by increasing enrollee cost-sharing amounts, using formularies to exclude certain drugs from coverage, applying quantity dispensing limits, requiring prior authorization, and using step therapy (starting with the most cost-effective drug and progressing to more costly therapy only if necessary). Private plans and Medicaid programs negotiate with pharmaceutical manufacturers to receive discounts and rebates that are applied based on volume, prompt payment, and market share.
Nearly all private health insurance plans cover prescription medicines; however, there is considerable variation in the drugs that are covered and the share of costs that the insured individual must bear. The vast majority of covered workers (87%) are in plans where policyholders pay different cost-sharing amounts for different classifications of drugs (generic, preferred, non-preferred) called “tiering.” While this can encourage consumers and their providers to use less expensive drugs, it can be problematic to low-income individuals, who may not be able to afford the higher co-payments charged for preferred medications which usually include brand-name drugs without a generic substitute. More than one in ten (11.2%) of adults between 18 and 64 reported that they went without or delayed filling a prescription medication because of the costs.
The Medicare Part D outpatient prescription drug benefit went into effect on January 1, 2006. Before this program, Medicare did not cover prescription drugs and beneficiaries either obtained coverage through supplemental plans or through Medicaid if they were dually eligible for both programs. Spending on the Part D program is estimated to have reached $60 billion in 2011 by Congressional budget analysis. While subsidies are available for low-income seniors for the associated costs of Part D, some Medicare beneficiaries still incur significant out-of-pocket expenses for their prescription drugs due to a gap in coverage which is often referred to as the Part D “donut hole.” The ACA will also help reduce out-of-pocket costs for Medicare beneficiaries by gradually closing the “donut hole.
Medicaid is the major source of outpatient prescription drugs for the low-income population and people with HIV/AIDS. While all state Medicaid programs cover prescription drugs, there are important differences in state policies with regard to copayments charged to enrollees, preferred drugs, and the number of prescriptions that can be filled. Prescription drug coverage accounted for 6.6% of total Medicaid spending in 2009 and 10% of total prescription drug spending in the U.S. There are also federal policies that help lower prescription drug costs under Medicaid, including the Section 340B Program, which requires manufacturers to provide drugs to certain providers such as community health centers at discounted prices as well as pharmaceutical company rebates to states for a portion of their Medicaid outpatient drug costs.
Access to coverage and the resulting use of prescription drugs will be expanded by the ACA’s health insurance mandate. Prescription drug coverage is one of the “essential health benefits” that must be included in health plans in state-based health insurance exchanges and in the benchmark benefit packages for newly eligible adults under Medicaid. The law increases Medicaid drug rebate percentages for several types of outpatient drugs and requires that the resulting savings be remitted to the federal government. The ACA is expected to improve coverage and reduce cost-sharing for seniors through the closing of the “donut hole” and other regulatory changes. The health reform law also makes a number of other changes that will affect drug costs, such as requirements for pharmaceutical companies to include additional information in labeling and advertising to help consumers make more informed health care choices.
In years 2015 through 2021, drug spending growth is expected to average 6.6% per year, reflecting the diminishing impact on spending from more patent expirations and the greater use of generic drugs. This is only slightly higher than projected average growth rates of hospital care (6.2%) and physician and clinical services (6.2%). Spending on prescription drugs will continue to be influenced by increasing use of generic drugs and patent expiration for “blockbuster” drugs, as well as growth in drug utilization and new therapeutic biologics and molecular entities entering the market.
Updated: December 2012