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Appropriate Drug Use and Prescription Drug Programs

Trends & Implications


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

In explaining the current environment and suggesting future policy implications, Dr. Kreling highlighted what factors are responsible for the current trends in pharmaceutical costs and utilization, and how policymakers, purchasers, manufacturers, and consumers have responded to this environment.

Currently expenditures for drugs are increasing more rapidly than other components of health care expenditures. Since 1995, expenditures for drugs have increased by 13-17 percent per year while hospital and physician costs grew only 3-7 percent per year. However, while expenditures for drugs have increased, drug expenditures account for about 10 percent of total national personal health care spending, compared with 36 percent for hospital care and 25 percent for physician services.

Factors contributing to the increase in prescription drug expenditures include price, utilization, and product mix, with utilization as the largest contributing factor. The number, scope, and length of time on the market of available drugs contributes to this increased utilization. While the percentage of generic prescriptions dispensed has increased, the sales share of generic drugs has decreased, along with the cost savings associated with their use due to increased dispensing of higher cost, newer drugs in the available product mix.

Price is another predominant factor contributing to increase in expenditures. In recent years, the average retail (consumer-level) price has increased 2 to 3 times as fast as general inflation. One factor contributing to price increases is the increased cost and use of newer and more expensive therapies entering into traditional product mix. Prices for brand name drugs are more than three times higher than generic drug prices and are increasing at a faster rate.

Utilization and price both raise issues of product mix. Kreling pointed out that although newer treatments enter the market, older treatments still exist and are still used. The product mix factor leads to a growth in number of prescriptions dispensed, and the increased use of high cost drugs within this mix leads to higher overall expenditures.

Kreling noted that certain underlying factors play a role in cost increases as well. For instance, spending by pharmaceutical companies on research and development to bring new products to market, and promotional costs, including direct-to-consumer advertising (DTC), continued to escalate. Additionally, increased insurance coverage of prescriptions is shielding more consumers from drug costs as shown in the data below. Medicare beneficiaries with drug coverage had more prescriptions and higher total drug costs than those without coverage.

Number of Prescriptions and Average Prescription Expense per Medicare Beneficiary, by Insurance Status, 1998

Average Number of Prescriptions per Medicare Beneficiary
Without drug coverage: 16.7
With drug coverage: 24.4

Average Prescription Expense per Medicare Beneficiary
Without drug coverage: $32.79
With drug coverage: $41.03

(Source: Poisal and Murray)

Kreling believes pharmaceutical expenditures will continue to rise in the foreseeable future. Factors affecting this rise will include the introduction of new products that will be more costly than the products they replace, the adoption of these products, and continued efforts to stimulate their adoption. Advances in the fields of biotechnology and genomics will bring a new face to drug treatment as well as new cost levels. Kreling noted that as technology and consumer expectations advance so too will pressures on expenditures.

Insurers and policymakers have responded to the current environment of increasing drug costs in several ways. To affect behavior, purchasers/insurers impose increased cost-sharing burdens on consumers through higher and tiered co-payment structures. To foster appropriate use, they have also utilized:

  • Drug utilization review (DUR) programs.
  • Formularies.
  • Prior authorization.
  • Electronic prescribing mechanisms (for reducing handwriting errors and assuring that prescription orders reach pharmacies correctly).

Recent proposals introduced in both the Senate and the House to include a prescription drug benefit in Medicare have included provisions such as formularies and medication therapy management to improve appropriateness of drug use, but they have not been enacted.


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

Poisal JA and Murray L. Growing Differences between Medicare Beneficiaries With and Without Drug Coverage. Health Aff 2001 Mar/Apr;74-85.

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