Drugs, Drug Prices and Your Health

By Calfee, John E. | Consumers' Research Magazine, May 2000 | Go to article overview
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Drugs, Drug Prices and Your Health


Calfee, John E., Consumers' Research Magazine


Pharmaceutical costs have aroused controversy for decades, but debate has intensified over the past year. Discussions have pursued several themes.

One is the rapid increase in expenditures for pharmaceuticals and the prices of some drugs. Another is the delineation and condemnation of price differences between the United States and other nations (especially Canada and Mexico) and among various domestic buyers, including the federal government, managed care organizations, and pharmacies that cater to individual consumers. Discussions also frequently target the promotion of pharmaceuticals (especially when directed at consumers), which is blamed for high prices, excessive expenditures, and inappropriate medication.

Price controls--to be achieved by design or by implication-- have become a political issue. Numerous federal and state legislators have proposed reducing pharmaceutical prices by various methods such as extending Medicaid discounts to neighborhood pharmacies, cutting U.S. prices to match those charged in Canada and Mexico, and even implementing direct controls.

It is certainly true that pharmaceutical expenditures have been increasing rapidly. Outpatient expenditures on prescription drugs (with inflation taken into account) almost doubled between 1990 and 1998. The increases have been larger in recent years, with the largest (12.3%) in 1998. Pharmaceuticals are also claiming an increasing share of the U.S. health care budget. Some historical perspective is useful here. Prescription costs as a proportion of health care expenditures actually declined for many years after 1960, with the trend reversing in the early 1980s. Even today, the share of spending on pharmaceuticals is still far below the levels of the early 1960s, although it has climbed from 4.9% of health care costs in 1985 to 7.2% in 1997. Most forecasters see pharmaceutical expenditures continuing to increase at 10% or more annually.

Price increases are not, however, the main reason for increased drug expenditures. Since 1993, the prices of prescription drugs have been increasing at less than 4% annually, only slightly above the general inflation rate and far below the rate of increase in expenditures for prescription drugs. According to surveys, higher prices for existing drugs account for less than one-fourth of the increased expenditures. The remaining increases result from increased volume and particularly from a shift toward more expensive drugs, which are usually newer on the market. Even the modest role for price increases is exaggerated because measurements of pharmaceutical price changes are upwardly biased: pharmaceutical price indexes (like those for many other products) fail to adjust for the higher quality of new drugs and the increased benefits from new uses for old drugs.

The dominant role of new drugs in pharmaceutical spending is reflected in the disproportionate increases in expenditures in the more innovative therapeutic areas. The largest increases between 1997 and 1998 involved heart medications and antidepressants, propelled by the success of the statin class of cholesterol-reducing drugs and of improved antidepressants. The path-breaking painkillers Celebrex and Vioxx boosted total sales for arthritis treatments in 1999, even as sales for older analgesics declined.

Reduced expenditures on other forms of health care have partially offset the increased expenditures on drugs because drugs reduce many costly side effects and may prevent or simplify medical procedures. For example, H2 antagonists (Tagamet and other drugs that suppress stomach acid secretion) reduced the costs of surgery of gastrointestinal ulcers by more than half. The use of "clot-busters" in treating strokes has reduced health care costs by about four times as much as the cost of the drug (not to mention the benefits to patients and families).

Consumer Benefits of Treatment Advances. The ability of pharmaceuticals to reduce the total expenditures for health care, as well as business costs, is important but secondary--and even something of a distraction.

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