In recent years American's have been spending more on prescription drugs. In 1990, 5.4% of total US health spending was for prescription drugs while by 2000 that figure had risen to 9.0%, or almost double. While still a comparative bargain at less than 10 cents of every health care dollar, the prescription drug share of health spending has been increasing steadily since the mid-1980s.1

Because American consumers pay a greater share out-of-pocket for prescription drugs than they do for physician or hospital services, they have been acutely aware of the growing costs of pharmaceuticals. This has lead to a common misperception that drug company price increases are the reason for higher drug spending.

However, the data show that price increases are not the primary culprit. Rather, the increase in drug spending has largely been driven by the introduction of new and better drugs.

For example, in 2000 prescription drug sales grew 14.7 percent, but only 3.9 percentage points of that growth came from price increases.2 The other 10.8 percentage points were attributable to more drugs being consumed and the prescribing of newer, more effective, and more expensive drugs in place of older, less effective and less expensive drugs. Similarly, in 1999 prescription drug spending increased 18.8 percent, but again, only 4.2 percentage points of the growth was due to higher prices. The remaining 14.6 percentage points were the result of increased volume and a shift to newer drugs.

Indeed, since 1994, though drug sales have increased anywhere from 8% to 19% each year, price increases have accounted for only about one-fifth of the increase each year with changes in the volume and mix of drugs consumed accounting for the other four-fifths.

Not surprisingly, manufacturers charge more for newer, better drugs and doctors and patients want to use more of them.

Footnote:

1 Data from U.S. Health Care Financing Administration, 2001 as reported in Figure 4-6, Pharmaceutical Industry Profile 2001, Pharmaceutical Research and Manufactures Association, Washington, DC, 2001.

2 Data from Retail and Provider Perspective, IMS Health, 2000 as reported in Figure 4-15, Pharmaceutical Industry Profile 2001, Pharmaceutical Research and Manufacturers Association, Washington, DC, 2001.