Is What I Hear True?

I heard that...

...prescription medication prices are one of the reasons healthcare spending is so high. Is that true?

This is not true. Prescription drugs, while some may find them expensive, account for only $1 out of every $10 spent on healthcare.

The prices of prescription medications in the U.S. are a concern for patients, doctors, and insurance plans. Prescription spending has risen rapidly, especially during the 1990s when the average annual rate of prescription spending growth was 12%. Until recently, the rate of increase for prescription medications was higher than the rate of increase for hospital or physician services. Spending on prescriptions has increased for several reasons. There are more people getting prescriptions than in the past and prescription prices have risen an average of 8.3% every year between 1994 and 2004 (Kaiser Family Foundation). There has been some slowing in the amount of spending on prescriptions—since 2003, yearly increases in the rate of drug spending have decreased (Aitken, et al., 2009)—but in 2009, more than a third of Ohio adults reported that they or someone in their household delayed filling a prescription because they could not afford to do so (Health Foundation of Greater Cincinnati, The, 2009). Still, prescription drugs account for only $1 out of every $10 spent on healthcare (Kaiser Family Foundation, 2008).

Pharmaceutical companies earn profits by offering the medications people want and doctors prescribe. They do this by creating new medications and finding new uses for or slightly modifying existing medications. When a company creates a new medication, that new medication is under patent for up to 20 years. The company faces no competition from other companies for the same drug—including a generic version—until the patent runs out. It can set a high price because no other company can offer the drug at a lower one.

Patents allow companies to recover the high costs of research and development for new products. According to the Pharmaceutical Research and Manufacturers of America (PhARMA; 2009), it takes 10-15 years and $1.3 billion to create a new medication. And, only 1 out of every 5 medications that enter clinical testing are eventually approved (Tufts Center, 2006). The question is how to ensure a supply of needed new medications without making these medications impossible for patients to afford.

Pharmaceutical companies use some of what they earn to develop new products, but they are also among the most profitable firms in the U.S. Between 1995 and 2002, pharmaceuticals were the most profitable of all American industries, and in 2004 drug companies ranked third with a profit margin of 16% after taxes (Tufts Center, 2006). Developing medications is very costly, but pharmaceutical companies spend almost twice as much on selling their products as on developing them (Gagnon and Lexchin, 2008). In fact, two-thirds of new pharmaceuticals are not break-through drugs but existing drugs to which small changes have been made (Congressional Budget Office, 2006). Furthermore, European countries, where brand-name prescription drug prices are negotiated by the government and are therefore lower, are more research-productive in the area of pharmaceuticals than is the U.S. (Light, 2009). 

For this reason, some experts recommend big changes in how pharmaceuticals are developed and sold. One idea is to rate new drugs according to how much better they are than what is already on the market. This way, consumers and other payers—including insurance plans--can decide to pay more to get more. Another idea is for the U.S. government to cover more of the cost of developing new drugs. This way, drug companies will not add that cost to the price of their products, and decisions about what new drugs to develop will not be made for commercial reasons (Jayadev and Stiglitz 2008).

Sources:

Kaiser Family Foundation. Prescription Drug Costs: Background Brief. www.kaiseredu.org/topics_im.asp?id=352&parentID=68&imID=1

Aitken, Murray, Ernst R. Berndt, David M. Cutler. 2009. Prescription Drug

Spending in the United States: Looking beyond the Turning Point. Health Affairs Web Exclusive, December 16: w151-w160. http://content.healthaffairs.org/cgi/content/abstract/hlthaff.28.1.w151.

Health Foundation of Greater Cincinnati, The (2009). Ohioans’ Experiences with Going Without Care Because of Cost. Cincinnati, OH: Author. Available at http://www.healthfoundation.org/ohip.html.

Kaiser Family Foundation (2008). Prescription Drug Trends. http://www.kff.org/rxdrugs/upload/3057_07.pdf

Pharmaceutical Research and Manufacturers of America (2009). Profile 2009. Washington DC: author. http://www.phrma.org/files/PhRMA%202009%20Profile%20FINAL.pdf

Tufts Center for the Study of Drug Development, “New Drugs Entering Clinical Testing in Top 10 Firms Jumped 52% in 2003-2005,” Impact Report 8, no. 3 (May/June 2006).

Gagnon, Marc-Andre, Joel Lexchin. 2008. The Cost of Pushing Pills: A New Estimate of Pharmaceutical Promotion Expenditures in the United State. PLoS Medicine, January. www.plosmedicine.org/article/info:doi/10.1371/journal.pmed.0050001.

Congressional Budget Office. 2006. Research and Development in the Pharmaceutical Industry. October. www.cbo.gov/ftpdocs/76xx/doc7615/10-02-DrugR-D.pdf.

Light, Donald W. 2009. Global Drug Discovery: Europe Is Ahead. Health Affairs, Web Exclusive, August 25. http://content.healthaffairs.org/cgi/content/abstract/hlthaff.28.5.w969.

Jayadev, Arjun, Joseph Stiglitz. 2008. Two Ideas to Increase Innovation and Reduce Pharmaceutical Costs and Prices. Health Affairs, Web Exclusive, November 16: w165. http://.content.healthaffairs.org/cgi/content/abstract/28/1/w165.

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