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Health Care Costs: Why Do They Increase? What Can We Do?

Addressing Pharmaceutical Expenditures


David H. Kreling, R.Ph., Ph.D., Hammel/Sanders Chair in Pharmacy Administration, Sonderegger Research Center, School of Pharmacy, University of Wisconsin, Madison, WI.

Ray Hanley, Director, Division of Medical Services, Arkansas Department of Human Services, Little Rock, AR.

Expenditures for prescription drugs are increasing more rapidly than other components of health care spending and are being felt in the budgets of many States. While prescription drugs represent approximately 10 percent of the total national personal health care spending, since 1995, prescription drug costs have been increasing in double-digit percentages. The main drivers of rising pharmaceutical costs include a changing product mix that includes more newer, higher cost drugs, and increasing utilization. Manufacturer price increases due to inflation play a smaller role.

The average retail prescription price has increased two to three times as fast as general inflation in recent years. The cost of newer, more expensive therapies and increasing use of those therapies contributes significantly to the dramatic rise in average retail price and expenditures. Prices for prescriptions for brand name drugs are more than triple than those for generic drugs.

Prescription utilization is increasing rapidly, with per capita prescription use increasing by more than two prescriptions per year in the past decade. Factors contributing to increased utilization include age, insurance coverage, and the number and scope of drugs available.

David H. Kreling, R.Ph., Ph.D., explained that the new, more expensive drugs in the product mix overshadow the increase in the percentage of generic prescriptions, resulting in a decrease in the proportional sales of generic drugs.

According to Kreling, underlying factors that contribute to increased pharmaceutical expenditures include:

  • Spending on research and development (R&D).
  • Spending on promotion, including increased direct-to-consumer (DTC) advertising.
  • Declining consumer out-of-pocket expenses.

Ray Hanley offered a Medicaid perspective on the increase in prescription drug expenditures. Hanley noted that as is the case with other public and private health plans, prescription drug expenditures are rising faster than other Medicaid services.

According to Hanley, there are several reasons for why Medicaid pharmaceutical budgets are strained, including:

  • Expensive new prescription drugs and Medicaid's sensitivity to drug costs due to large numbers of elderly and disabled covered by the program.
  • Expansion of coverage to new groups of eligibles.
  • Restrictions placed on the ability to use cost controls such as formularies and tiered co-payments.
  • Lack of a Medicare drug benefit.

Hanley suggested the following options for appropriately lowering Medicaid prescription drug costs, including:

  • Prescriber education.
  • Co-payments.
  • Formularies.
  • Prior authorization, where appropriate.
  • Disease management.

Hanley concluded with the message that as difficult as it is to slow the rate of increase in Medicaid drug expenditures, we are duty bound to keep at it for the proper stewardship of tax dollars and to serve those whose needs could be met with savings achieved from cost containment.

Additional Resources

Berndt E. The U.S. Pharmaceutical Industry: Why Major Growth in Times of Cost Containment? Health Affairs 2001 Mar/Apr 20(2):100-14.

Kreling D, Mott D, Wiederholt J, et al. Prescription Drug Trends: A Chartbook. The Kaiser Family Foundation: Washington, DC; 2000 Jul.

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