Report to the President: Prescription Drug Coverage, Spending, Utilization, and Prices.. Factors in Spending Growth

04/01/2000

The very rapid growth in drug spending in recent years has been attributed to a variety of factors:

  • Part of the growth in drug spending is attributable to price increases for existing drugs. Although price increases have been less than one percentage point above general inflation since 1994, these increases (including the effect of general inflation) still contribute significantly to the total increase in drug spending.32
  • Second, the nature of the drugs people receive has changed. There has been a shift toward newer drugs. The number of new drugs introduced each year has grown rapidly, from 23 new drugs introduced in 1990 to 53 new drugs introduced in 1996; the Pharmaceutical Research and Manufacturers of America (PhRMA) estimates that 100 new drugs were introduced in 1997 and 1998.33 Many of these drugs have been breakthrough treatments; others are merely incremental improvements over existing therapies, or “me tooSecond, the nature of the drugs people receive has changed. There has been a shift toward newer drugs. The number of new drugs introduced each year has grown rapidly, from 23 new drugs introduced in 1990 to 53 new drugs introduced in 1996; the Pharmaceutical Research and Manufacturers
  • Finally, utilization has grown dramatically. The number of prescriptions filled by retail and mail-order pharmacies grew by 32 percent between 1992 and 1998 (NACDS). There are a number of possible reasons. An aging population may have a higher incidence of chronic conditions for which drug therapy is appropriate, although these demographic changes are occurring only gradually. The use of prescription drugs is also likely growing because of changes in medical practice, including the rise in managed care, Finally, utilization has grown dramatically. The number of prescriptions filled by retail and mail-order pharmacies grew by 32 percent between 1992 and 1998 (NACDS). There are a number of possible reasons. An aging population may have a higher incidence of chronic conditions for which drug therapy is appropriate, although these demographic changes are occurring only gradually. The use of prescription drugs is also likely growing because of changes in medical practice, including the rise

A recent study by the Barents Group for the National Institute for Health Care Management (NIHCM) attempted to measure the relative importance of different factors in the growth of drug spending, as shown in Table 2-33. In general, the study split inflation into two categories: “price” effects and “utilization” effects. Each of these effects were further split between older drugs (drugs that entered the market before 1992) and new drugs (drugs that entered the market in 1992 or later).

The study found that about two thirds of spending growth from 1993 to 1998 was attributable to price. Of this portion, 22 percentage points were attributable to pure price increases for older drugs. Another 42 percentage points reflected the fact that newer drugs cost more than older drugs: the study estimated that the average 1998 price for drugs introduced in 1992 or later was $71.49 per prescription, compared to $30.47 for previously existing drugs. This difference reflects higher initial introduction prices as well as price increases after introduction. The study did not attempt to measure how much of this difference reflects changes in quality as better, newer drugs replace older, less effective medications.

The study reported that increased utilization accounted for about one third of spending growth. If price levels and the mix of prices had not changed between 1993 and 1998, 36 percent of the total spending growth would still have occurred as a result of the increased number of prescriptions. Increased utilization of newer drugs contributed almost twice as much as utilization of older drugs to this increase.

  Percent of rise in drug spending attributable to prices (at introduction and subsequent increases) Percent of rise in drug spending attributable to utilization Total
Table 2-33. Percentage Contribution of Changes in Price and Utilization to 1993-98 Increase in Prescription Drug Spending
New drugs (1992 or later) 42% 23% 65%
Older drugs 22% 13% 35%
Total 64% 36% 100%
Source: National Institute for Health Care Management Research and Educational Foundation, Factors Affecting the Growth of Prescription Drug Expenditures, Washington, 1999.

Table 2-34 shows some of the components of spending growth for Medicare beneficiaries. Both utilization and cost per prescription grew from 1995 to 1996. This analysis did not attempt to measure changes in the mix of drugs. Average cost per prescription grew by 6.4 percent, more rapidly than during the preceding years. The cost change was larger than the change in utilization for HMO enrollees and those in employer plans. The reverse was true for Medicaid beneficiaries and purchasers of individual coverage; for these groups utilization grew faster than price. For beneficiaries with no Medicare supplement, both utilization and average price dropped. This may mean that these beneficiaries were less able to afford prescription drugs. However, it might also suggest that the highest spenders in 1995 were disproportionately represented among beneficiaries who newly gained drug coverage in 1996.

Table 2-34. Percent Change in Average Number of Prescriptions and Expenditure per Prescription for Medicare Beneficiaries with and without Drug Coverage, by Primary Medicare Supplement, 1995-19961
Type of Insurance Coverage Growth in Average Number of Prescriptions Per Beneficiary Growth in Average Expenditure per Prescription
Total Covered Not covered Total Covered Not Covered
             
All Beneficiaries 5.5% 4.2% 4.4% 6.4% 7.1% 2.5%
             
No Supplemental Coverage (FFS Medicare only) -2.8%   -2.8% -4.6%   -4.6%
Supplemental Coverage:            
Medicare Risk HMO 7.9% 8.5% * 9.3% 10.3% *
Medicaid2 8.5% 8.1% 20.6% 7.8% 7.7% 14.9%
Employer-sponsored3 2.9% 2.5% 3.9% 8.0% 7.4% 6.5%
Individually-purchased only 7.2% 6.0% 6.8% 2.9% 0.2% 4.1%
All other4 19.0% 17.4% 27.6% 7.4% 6.9% 13.7%

1Each person has been assigned to one supplementary insurance category but they may or may not obtain their drug insurance coverage from that source.

2Includes beneficiaries receiving full Medicaid benefits, as well as QMBs and SLMBs.

3 Includes those who only had employer-sponsored supplemental insurance and those who had both employer-sponsored and individually-purchased supplemental insurance.

4 Includes other public programs such as VA, DOD, and State Pharmaceutical Assistance Programs for low-income elderly, as well as non-risk HMOs (cost and HCPP plans).

* Number is unreliable because of small sample size.

Source: Information and Methods Group, Office of Strategic Planning, Health Care Financing Administration(now known as Centers for Medicare and Medicaid Services(CMS)): Medicare Current Beneficiary Survey Cost and Use File, 1995 and 1996.

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