INTRODUCTION
Medical advances, including prescription drugs, allow people to enjoy longer, healthier lives. Some pharmaceuticals have been credited with reducing long-term health costs by improving disease outcomes, reducing hospital admissions and shortening hospital lengths-of-stay. Americans are using prescription drugs in record numbers, as the industry produces more and better pharmaceuticals. It is estimated that nearly half of Americans take at least one prescription drug each day and a quarter take multiple drugs daily. Total pharmaceutical spending reached $124.7 billion in 2000, about twice as much as 1995 expenditures. This tremendous growth has outpaced spending changes in physician services and hospital care since 1993.
For states, this upward trend has manifested itself in state employee health plans and Medicaid, where spending for prescription drugs has grown faster than any other spending category. Medicaid provides prescription drug coverage to about one in ten non-elderly Americans and one in eight Medicare recipients. Since federal law allows only nominal Medicaid copayments and requires an open formulary, states have fewer options than private managed care plans in controlling the utilization of prescription drugs in the Medicaid population. State expenditures for Medicaid outpatient prescription drugs ballooned from $4.8 billion in 1990 to $16.6 billion in 2000, a figure that does not include drugs paid for by Medicaid managed care or hospitals.
Increase in Prescription Drug Utilization
According to the Kaiser Family Foundation, increased utilization is the largest factor in increased pharmaceutical spending. Between 1997 and 2000, increased utilization accounted for nearly half of drug spending growth. The number of retail prescriptions filled increased from about 7 per capita in 1992 to nearly 11 in 2000. The aging population-which uses about twice as many prescriptions as the national average-is a major contributor to this utilization trend. This demographic shift will be even more pronounced as baby boomers grow older and seek treatment for more chronic conditions. Prescriptions for the elderly are not just more numerous-they are also more expensive than prescriptions for younger people.
The increasing number of "maintenance" drugs for chronic or life-long conditions that were previously untreated or treated with over-the-counter medication has also lifted pharmaceutical spending. For example, it is estimated that the market for osteoporosis prevention drugs will quadruple by 2007 and the introduction of a new class of asthma drugs in the next several years may hike annual spending by the 17 million asthma-sufferers in the United States. Early diagnosis and treatment of many diseases, such as cancer or diabetes, also lead to increased pharmaceutical use over a longer period of time.
Increase in Prescription Drug Prices
The average retail price of prescription drugs more than doubled in the 1990s according to the Kaiser Family Foundation, from $22.06 in 1990 to $45.79 in 2000. This dramatic increase is primarily due to new high-cost drugs replacing the older drugs in the each therapeutic class. The high cost of new drugs reflects the higher ingredient cost for newer pharmaceuticals, inflation, and development and marketing costs. Third-party insurers have borne most of this cost increase: prescription drug spending by third-party insurers more than doubled between 1992 and 1997 while consumers' out-of-pocket spending decreased.
Influence of the U.S. Food and Drug Administration (FDA)
The FDA has influenced rising prescription drug costs in two powerful ways: speeding the approval process for new drugs and loosening standards on direct-to-consumer marketing. The federal Prescription Drug User Fee Act of 1992 allowed the FDA to collect "user fees" from the pharmaceutical industry, in exchange for making the approval process faster. The median total approval time for new molecular entities-NMEs, an active substance never approved in any form for marketing in the U.S.-fell from 23 months in 1993 to nearly 12 months in 1999. Approval time increased slightly in 2000 because fewer drugs merited FDA classification as priority drugs and therefore failed to qualify for expedited review. The flood of newly available drugs-NMEs and altered versions of previously approved drugs-has contributed to the utilization increases in the 1990s. Legislation passed in 1997, the FDA Modernization Act, sought to further decrease both FDA review time and total drug development time.
Direct-to-consumer (DTC) advertising has been allowable since 1985 but was not a large share of total drug promotions until the FDA relaxed pharmaceutical marketing guidelines in 1997. DTC advertising climbed from $791 million in 1996 to nearly $2.5 billion in 2000. Pharmaceutical companies have reaped the benefits: the 10 most advertised drugs in 1998 accounted for more than a fifth of total prescription drug expenditure growth between 1993 and 1998 and heavily-promoted drugs tend to dominate their therapeutic category. Patients are increasingly asking physicians for brand name drugs and, according to a study by Prevention magazine and the American Pharmaceutical Association, physicians honor patient requests in more than 70% of cases.
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