Academic journal article Monthly Labor Review

Employer-Sponsored Prescription Drug Benefits

Academic journal article Monthly Labor Review

Employer-Sponsored Prescription Drug Benefits

Article excerpt

Almost all full-time employees with employer-provided medical care benefits had prescription drugs coverage in 1989, but benefits differed for brand name and generic drugs and by type of health care plan

Medications can come in many forms, from over-the-counter pain killers and stomach soothers, to prescription drugs. As expected, most medical care plan treat medications differently, typically providing no coverage for home remedies, limited coverage for over-the-counter products, and the most comprehensive coverage for most prescription drugs. Typically, prescription drugs (as well as over-the-counter medications) provided to patients in a hospital are covered as part of a medical plan's hospital room and board benefits.(1) Outpatient prescription drugs are also covered by most medical care plans. This article examines outpatient prescription drug coverage available through employer-provided medical care plans.

This article is based on data from the Bureau of Labor Statistics 1989 survey of benefits for full-time employees in medium and large firms. The survey provides data for 32 million employees. Data represent benefit provisions for workers in about 109,000 establishments employing 100 workers or more in private nonfarm industries.(2)

There is considerable interest in medical care plan coverage for outpatient prescription drugs, prompted by increasing drug prices and a variety of new drugs. Data on drug manufacturing and pricing are discussed in the first part of this article, followed by a look at how medical plans cover prescription drug benefits.

Prescription drugs

The cost of medical care increased rapidly during the 1980's. Between 1979 and 1989, the price of all medical care rose 119 percent, as measured by the Bureau's Consumer Price Index.(3) During the same period, the Consumer Price Index for all items rose 64 percent. (See chart 1.) While the indexes of all the major components of medical care rose sharply during the 1980's, hospitalization grew at the highest rate, 162 percent, two-and-a-half times the general rate of inflation in the same period; prescription drug costs followed closely behind, with an increase of 151 percent between 1979 and 1989.

In 1989, Americans spent $17.7 billion on outpatient prescription drugs, more than twice the amount spent in 1979.(4) While these figures are staggering, in terms of constant dollars, expenditures on prescription drugs accounted for 3 percent of all health care expenses in 1989, a drop from 5 percent in 1979.(5) This decline reflects the fact that real annual expenditures on prescription drugs fell by 2 percent, while all medical care expenses rose by 44 percent. This difference partly result from the unusually rapid increase in consumption of other types of medical care, including hospitalization, physicians' care, and certain diagnostic tests, during the 1980's. The large increase can be attributed to the rise in the proportion of older Americans and the growing availability and use of some types of health care.(6) The increased availability of generic drugs contributed to the decrease in the growth rate of prescription drug expenditures.

Drug pricing is affected by the complex process of introducing a new drug to market. The Food and Drug Administration employs a drug approval process which is designed to ensure consumer safety. It takes approximately 12 years for drug manufacturers to recoup their outlays for product development and testing, averaging about $231 million per drug.(7)

The ability of a pharmaceutical manufacturing firm to secure its share of the market depends not only on its productive capacity but also on its capacity for research and development and its advertisement and promotion. These components account for the comparatively high price of newly manufactured drugs.(8) New drugs may be costly because of the nature of prescription drug patents. The original manufacturer has a relatively short time to recoup expenses and gain a profit. …

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