Skip Navigation U.S. Department of Health and Human Services
Agency for Healthcare Research Quality
Archive print banner

Health Care Access/Use

This information is for reference purposes only. It was current when produced and may now be outdated. Archive material is no longer maintained, and some links may not work. Persons with disabilities having difficulty accessing this information should contact us at: Let us know the nature of the problem, the Web address of what you want, and your contact information.

Please go to for current information.

Researchers examine drug expenditures and drug formularies

Prescription drug expenditures made up only 9.4 percent of total health care costs in 2000, yet spending on prescription drugs increased by more than 200 percent between 1990 and 2000, making it the most influential driver of health care spending increases. As drug costs have soared, employers have turned to pharmacy benefit management and drug formularies to try to control drug costs.

A recent study that was supported in part by the Agency for Healthcare Research and Quality (National Research Service Award training grant T32 HS00083) projected prescription drug expenditures for 2003. A second study (AHRQ grant HS10803) found that a national drug formulary can lead to sizable price and spending reductions, even for the elderly and disabled.

Summaries of the two studies follow.

Shah, N.D., Hoffman, J.M., Vermeulen, L.C., and others (2003, January). "Projecting future drug expenditures, 2003." American Journal of Health-Systems Pharmacy 60, pp. 137-149.

These researchers forecast a 10 to 12 percent increase in hospital drug expenditures for 2003, 2 to 2.5 percent due to price inflation, 7 to 8.5 percent due to volume and patient mix factors, and 1 percent related to new drugs. They projected an increase of 13.5 to 15.5 percent in prescription drug expenditures in the outpatient setting, 3.5 to 4 percent due to price inflation, 9 to 10 percent due to volume and patient mix factors, and 1.5 percent related to new drugs.

Several factors are contributing to growing outpatient drug costs. More patients and diseases continue to be treated by medication administered at clinics. The majority of cancer treatment is performed on an outpatient basis, and high-cost antineoplastic agents are the primary reason for increased costs in this area. Although outpatient prescription drug use is expected to continue to grow, expenditure increases will be moderated by the approval of generic versions of several high-volume medications for which the patents have expired and the approval for over-the-counter dispensing of some prescription drugs, such as loratadine (Claritin, Schering-Plough).

While few blockbuster agents will be approved in 2003, the continued diffusion of extremely costly agents approved in previous years will make drug budgeting and drug expense management a challenge, note the researchers. Their projections were based on interpreting data from several large-scale studies on trends in prescription drug expenditures and cost drivers, which are published annually. The studies included prescription drug data from a sample of retail outlets, which were then weighted to reflect the entire U.S. retail market; prescription claims data on individuals in health plans served by one large group; and data on prescription drug sales in retail and nonretail settings.

Huskamp, H.A., Epstein, A.M., and Blumenthal, D. (2003, May). "The impact of a national prescription drug formulary on prices, market share, and spending: Lessons for Medicare?" Health Affairs 22(3), pp. 149-158.

Prescription drug formularies—a select list of covered drugs that an insurer usually obtains at discounted prices from the manufacturer—can reduce drug costs, concludes this study. The researchers found that implementation in 1997 of a national closed formulary by the Veterans Health Administration (VHA), the largest health care system in the country, effectively shifted patients toward the selected formulary drugs, achieved sizable price reductions from drug manufacturers, and greatly decreased drug spending.

Veterans and their families could obtain coverage for medications not listed on the closed formulary only if the doctor believed that the drug was clearly preferable and obtained a waiver. The researchers obtained monthly price data and aggregate spending data for each drug product in six drug classes from January 1995 through July 1999, 29 months before adoption of the formulary and 26 months after.

Overall, the VHA national formulary saved an estimated $82.4 million for the five drug classes that were closed at some point over this time period. Class closure was associated with a decrease in average spending per outpatient user of 25 percent for angiotensin converting-enzyme (ACE) inhibitors, 18 percent for alpha blockers, 8 percent for HMG-CoA reductase inhibitors, 7 percent for proton pump inhibitors, and 41 percent for H2 blockers, relative to what estimated spending per user would have been without the formulary. Calcium channel blockers, classified as preferred (their use was encouraged over other drugs in the same class) throughout the study period, were estimated to have had a spending increase associated with preferred status.

Return to Contents
Proceed to Next Article

The information on this page is archived and provided for reference purposes only.


AHRQ Advancing Excellence in Health Care