The nation’s spending for prescription drugs has grown dramatically in recent years. Table 2-29 shows estimated total national health expenditures and prescription drug expenditures for selected years from 1965 through 1998, along with HCFA(now known as CMS)’s projections to 2008. All numbers are in nominal dollars and thus reflect general inflation during this period. Figure 2-14 shows the trend in drug spending in 1998 dollars: even when controlling for general inflation, there has been a dramatic increase in drug spending, especially since the mid-1980s.
Figure 2-14. Real Spending for Prescription Drugs for the Total Population, 1965-1998 and Projected 1999-2008, in 1998 Dollars
Source: National Health Statistics Group, Office of the Actuary, Health Care Financing Administration(now known as Centers for Medicare and Medicaid Services(CMS)): National Health Accounts . Adjusted for inflation using the historical CPI-U through 1998 and OMB projections of CPI-U for 1999 through 2008.
Through the 1970s and 1980s, drug spending grew somewhat more slowly than overall health spending—at an annual rate of 10 percent a year, compared to 12 percent for all health spending. In the 1990s, growth in drug spending began to outpace growth in spending for other kinds of health services. As a result, the share of health expenditures going to prescription drugs increased throughout the 1990’s, growing from 5.4 percent in 1990 to 7.8 percent in 1998 (see Figure 2-15). Part of this trend may be attributed to a slowing of the growth in health expenditures associated with the expansion of managed care. Some analysts contend that growth in drug spending also contributed to the moderation in spending growth for other services. They suggest that some new drug therapies replaced more costly treatments; for example, new asthma drugs may have reduced emergency room utilization. While these substitution effects have been identified in specific instances, it is not possible to assess the aggregate degree of substitution that may be occurring. This could be a fruitful area for future research.
Figure 2-15. Prescription Drug Expenditures as a Percent of National Health Expenditures, 1965-1997
Source: National Health Statistics Group, Office of the Actuary, Health Care Financing Administration(now known as Centers for Medicare and Medicaid Services(CMS)): National Health Accounts.
HCFA(now known as CMS) projects that growth in drug spending will moderate slightly in the coming years. This is partly because the patent protection for many top-selling brand-name drugs will expire over the next decade. The likely appearance of generic equivalents for these drugs will depress spending growth slightly. Still, many new medications are expected to appear, and drug spending is projected to consume a steadily larger share of total spending by all the major payment sources.
Between 1965 and 1998, spending on drugs by every major payment source – private insurers, Medicaid, consumers’ out-of-pocket payments, and other sources – increased faster than general inflation. However, expenditures by some sources have increased much faster than others. As Table 2-30 and Figure 2-16 show, the result has been a substantial shift in the share of drug expenditures that each source accounts for.
Figure 2-16. Spending for Prescription Drugs by Payment Source, Total Population, 1965-1998, in 1998 Dollars
*Nominal spending in 1965 was $3.7 billion.
Source: National Health Statistics Group, Office of the Actuary, Health Care Financing Administration(now known as Centers for Medicare and Medicaid Services(CMS)): National Health Accounts. Adjusted for inflation using the CPI-U.
Private insurance payments accounted for only 3.5 percent of all prescription drug expenditures in 1965; by 1998, private insurers paid just over half of all drug costs. One of the major factors in this shift has been the addition of outpatient prescription drugs to the standard benefit package that private insurers offer. In 1965, it was much less common than it is today for health plans to include drugs in their benefit package. More recently, the trend toward an increasing insurer share may also be related to the shift to managed care and the corresponding move from benefit packages with deductibles and coinsurance to no-deductible plans with fixed copayments.31
Medicaid has also covered an increasing share of prescription drug expenditures since its creation in 1965. In 1975, Medicaid paid for just over a tenth of all drug expenditures. The program now covers almost a fifth of all drug costs.
While the population’s out-of-pocket spending on prescription drugs grew significantly between 1965 and 1998 in dollar terms, the share of total drug expenditures that were paid out-of-pocket dropped from 93 percent to only 27 percent. HCFA(now known as CMS) projects that out-of-pocket spending will begin to grow more rapidly than it has in recent years, as insurers and employers respond to higher drug costs by passing some of these costs on to health plan enrollees. However, HCFA(now known as CMS) projects that insurer spending on drugs will grow even more rapidly, continuing the slow shift from out-of-pocket expenditures to other sources of payment.
It is not possible to separate Medicare beneficiaries from the rest of the population in the National Health Expenditures data. However, some of the findings of this report suggest that the sources of spending have been different for Medicare beneficiaries compared to the rest of the population. As Chapter 1 showed, many beneficiaries continue to lack access to a source of coverage for their prescription drug costs. As a result, the trend toward increasing coverage of drug costs by insurers has likely been much less dramatic over time for Medicare beneficiaries than for the rest of the population. The next section will explore overall spending and utilization trends for Medicare beneficiaries more recently, using the Medicare Current Beneficiary Survey.