Pharmaceutical Pricing Practices, Utilization and Costs - Meeting Summary. 1. Explaining the Growth in Prescription Drug Spending: A Review of Recent Studies--Mark Merlis, M.A.


Mr. Merlis, citing data from the U.S. Health Care Financing Administration(now known as Centers for Medicare and Medicaid Services(CMS)) (HCFA(now known as CMS)), reported that U.S. prescription drug spending grew at double the rate of total U.S. health spending between 1993 and 1998. Prescription drugs currently account for one-eighth of private insurance expenditures and one-tenth of Medicaid expenditures.

Mr. Merlis reviewed four recent studies of U.S. expenditures on prescription drugs to see whether there were any points of consensus in the studies and to explain why the studies differ in their conclusions. Three of the studies--one by Express Scripts, one by Merck-Medco, and one by Brandeis University and PCS Systems--relied on data on privately insured populations supplied by pharmacy benefit managers (PBMs). The fourth study, prepared by the Barents Group for the National Institute of Health Care Management, relied on data for the entire U.S. population.

All of the studies reviewed by Mr. Merlis suggest that the following factors account for the recent double-digit increases in U.S. prescription drug expenditures:

  • A change in the mix of drugs utilized--i.e., a shift from older drugs to newer, more expensive drugs, and within the class of older drugs, a shift from less expensive drugs to more expensive ones.
  • Unit price inflation--i.e., increases in the cost of a given pill over time (the price of a constant market basket of drugs has been going up about 4% per year).
  • Four volume-related factors: (1) more people are getting more prescriptions; (2) those who do get prescriptions get more prescriptions a year; (3) each prescription is for a longer period on average; and (4) within each day's supply of a prescription drug, the strength and dosage are increasing.

The studies' conclusions about the relative importance of these factors differ, because studies group some of these factors together in different ways. Nonetheless, all of the studies suggest that a large portion of the prescription drug spending and spending growth in recent years is due to drugs already on the market. According to Mr. Merlis, spending increases among the privately insured populations in the Express-Scripts and Brandeis studies break down into the following components: cost increases for existing drugs, 40%; more prescriptions for existing drugs, 20%; prescriptions for new(1) drugs, 20%; higher cost of new drugs, 20%. These two studies suggest that there has been dramatic growth in the utilization of drugs in a few therapeutic categories--cardiovascular, gastrointestinal, psychotherapeutic, anti-infective, and antidiabetic medications--plus fairly uniform cost increases in every therapeutic category.

1 - "New" drugs are defined by the Brandeis Study as any drug introduced in 1995 or later, and by the Express-Scripts Study as any drug introduced in 1996 or later.