A Hard Bill To Swallow

October 5, 2007
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Spending on prescription drugs in the United States topped $200 billion for the first time in 2005, a drastic jump from the amount Americans spent just 15 years earlier.

According to the Henry J. Kaiser Family Foundation, the nation spent $40.3 billion on prescriptions in 1990. The $200.5 billion spent two years ago marked an increase of almost 400 percent over that amount, or nearly five times as much.

And spending on prescriptions has risen at a much higher clip than inflation.

The Consumer Price Index reports that what could have been purchased for $40.3 billion in 1990 would have been worth $61.2 billion in 2005, about a 50-percent rise and not the 228-percent climb seen in prescription-drug spending over those years. That climb rose by double digits each year from 1994 to 2003.

In 2005, though, spending only rose by 6 percent from 2004 because more generic drugs were prescribed, Medicaid slowed its spending, and fewer new drugs were introduced.

The Kaiser report, released last May, cited three factors that have changed the market:

**Doctors are writing more prescriptions. The number of prescriptions purchased in the nation rose by 71 percent from 1994 to 2005, going from 2.1 billion to 3.6 billion.

**Retail prescription prices are higher. Prices rose 7.5 percent per year from 1994 to 2006, rising from an average price of $28.67 to $68.26 — almost triple the average inflation rate for those years.

**Drug usage is changing. New drugs can increase overall spending when prescribed to replace or supplement older, less expensive medications, or if new drugs are used for conditions that didn't required drug therapy in the past.

The Kaiser report said a lesser, but still important, part of the change is the fact that pharmaceutical firms can now market directly to consumers. Ads can influence a consumer to choose a higher-priced drug, or to ask a physician for a prescription for what previously wasn't considered a medical condition, such as male-pattern baldness or erectile dysfunction.

The share of advertising that drug manufacturers directed at consumers rose by 5 percent in 2005 to $4.2 billion, while ads aimed at physicians dropped by 8 percent that year, to $7.2 billion. Just a decade earlier, drug advertising to consumers only totaled $800 million in 1996.

Fortune magazine reported that drug manufacturing was the fifth most profitable industry in the nation in 2005 and the second most profitable last year.

So where did the $200 billion spent on prescription drugs come from in 2005? Public dollars picked up the tab for $54 billion, private health insurers paid for $94 billion, and consumers dug deep into their pockets for about $50 billion.

When the 2006 spending figures are released next year, the numbers are expected to show that more public dollars were spent on prescriptions, while fewer dollars came from private insurers and consumers because of Medicare Part D. Medicare's share of public funds has been projected to rise from 7 percent in 2005 to 55 percent in 2006.

But despite higher spending on prescriptions in 2005, that expenditure remains stable when it is factored as a percentage of total spending on health care. Money spent on drugs represented about 10 percent of the total medical expenditures recorded in 2005 when that figure reached $2 trillion. The nation's drug spending has hovered near that percentage since at least 2001. (See related chart.)

As for future spending on prescriptions, the U.S. Department of Health and Human Services has projected it will soar to $497.5 billion in 2016 — an increase of 148 percent from 2005. The yearly hike is expected to rise from 5.8 percent in 2005 to 9.4 percent in 2016. In 2016, drug spending is expected to be 12 percent of all expenditures for health care.

The reasons the Department of Health and Human Services has given for the projected higher spending are: 1) generic drugs will be prescribed less often in the coming years; and 2) new drugs that treat cancer and other serious diseases will reach the marketplace and will be in demand. HQX

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