Pharmaceutical Pricing Practices, Utilization and Costs - Meeting Summary. 2. Factors Driving Pharmaceutical Expenditures: An Overview--Ernst Berndt, Ph.D.


Dr. Berndt said that, according to data from IMS Health, U.S. sales of prescription drugs have grown about 13% a year since 1987. Dr. Berndt hypothesized that there are four reasons behind this growth:

  • The importance of being unimportant. Prescription drugs have enjoyed an era of benign neglect because they have accounted for a relatively small proportion of U.S. health expenditures in comparison with hospital care and physician fees. That share has been increasing rapidly, though, and the era of benign neglect is probably over.
  • Growth in third-party insurance coverage for prescription drugs, leading to increased demand. In 1965, less than 10% of all prescription drug payments were paid by third-party insurers; by 1998, the figure had grown to 75%.
  • Introduction of new pharmaceutical products. According to IMS Health, about 43% of the growth in the U.S. pharmaceutical expenditures since 1995 is due to the introduction of new products.
  • Aggressive pharmaceutical technology transfer and marketing efforts. Marketing-to-sales ratios for pharmaceuticals are fairly high (10-20%), in part because pharmaceuticals are "experience goods" (i.e., goods that consumers have to try to see if they like them). In the past, pharmaceutical marketing efforts broke down as follows: detailing and sampling (75-80%), advertising in medical journals (10%), direct-to-consumer (DTC) ads (5%), and sponsorship of continuing education (10%). DTC marketing of prescription drugs, especially drugs that treat widely prevalent, non-life-threatening chronic conditions, has increased dramatically in recent years and now probably represents 10-20% of marketing efforts.