Drug Prices Remain on the Cutting Board

Efforts to cut healthcare outlays will focus on drug costs, despite a drop in prescription sales.
Feb 02, 2009
Volume 33, Issue 2

Jill Wechsler
The new administration, Congressional leaders, and healthcare payers and providers are eager to reform the nation's healthcare system to make quality care more available and affordable. The main problem is that the cost of healthcare keeps rising faster than the US economy is growing, with few gains in quality of care. Everyone wants to change policies and practices to reduce unnecessary spending and make the system more fair and more efficient than it is. Yet agreement on how to accomplish that goal remains elusive.

The task is enormous from any perspective. The Congressional Budget Office (CBO) and the Centers for Medicare and Medicaid Services (CMS) estimate that the nation will spend $2.6 trillion for healthcare in 2009, or 17% of gross domestic product. Without any policy changes, that amount will rise to 20% of GDP by 2017 and nearly 50% in 2082, according to CBO's December 2008 report Key Issues in Analyzing Major Health Insurance Proposals.

Annual spending will increase from $8300 per person today to $13,000 by 2017, and federal outlays for Medicare and Medicaid will grow from $720 billion in 2009 to about $1.4 trillion by 2019, according to the report. The number of uninsured, moreover, will rise from 45 million today to about 54 million in 10 years because health-insurance premiums will increase much faster than income, making coverage more difficult to afford.

Drop for drugs

One bright spot in the healthcare cost picture is a slowdown in expenditures for prescription drugs. In 2007, the growth rate for spending on prescription drugs hit a 45-year-low, according to the CMS Office of the Actuary. Outlays for drugs rose only 4.9% to $227.5 billion, roughly half the 8.6% rise in 2006 and the slowest rate of growth since 1963. And prescription drug prices rose a paltry 1.4% in 2007, even less than the 3.5% price rise in 2006.

A main force behind the drop in pharmaceutical outlays is increased use of cheaper generic medications, CMS and other analysts report. Generic drugs accounted for 67% of drug dispensing in 2007, up from 63% in 2006 and 60% in 2005. That trend is being spurred by the increase in blockbuster drugs losing patent protection, increased competition among generic drugmakers as six-month exclusivity periods expire, and a boost in multitiered drug formularies that set higher copays for branded products.

An added force driving down use was rising concerns about drug safety. An increase in black-box warnings required by the US Food and Drug Administration discouraged patients and prescribers from relying on medicines to treat certain conditions. These factors have contributed to a drop in the number of new blockbuster drugs coming to market and resulted in a smaller number of new therapies able to command premium prices.

Slow growth in drug outlays was "one of the major factors driving down overall healthcare spending growth in 2007," said Micah Hartman, a CMS statistician. CMS noted that expenditures on healthcare increased only 6.1% in 2007 to $2.2 trillion, the smallest rate of increase since 1998. Still, the portion of the economy devoted to healthcare will continue to increase as expenditures for drugs, hospitals, physicians, and other healthcare services, grow faster than inflation.

In Washington This Month
Although the rate of increase in drug spending has declined, actual outlays for pharmaceuticals continue to rise. Expenses are projected to total $264 billion this year, with about $100 billion coming from government coffers. "So we still have an affordability problem," said CMS actuary Rick Foster at a briefing in January. While the economic recession may slow spending more than projected, Foster doesn't expect the low 2007 spending rate to continue.

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