Do Americans Spend too Much on Prescription Drugs?

Many people think that Americans now spend too much on prescription drugs. In fact, it can be argued that Americans probably spend too little. One reason is that drugs are often a cost effective alternative to other therapies, such as hospitalization or surgery.1 Indeed, one recent study found that every dollar spent on prescription drugs is associated with a $4 decline in hospital spending.2

To take a specific example, a 1995 study by the U.S. Agency for Health Care Policy Research concluded that the increased use of a blood thinning drug could prevent 40,000 strokes a year. The lifetime cost of a stroke exceeds $100,000 compared to an average annual cost of drug therapy and monitoring of $1,025.3

In other cases, new drugs produce better results at lower costs than older drugs. For example, a 1999 study found that the use of a new drug to treat schizophrenia cut inpatient costs by an average of $27,850 per patient per year at Texas state psychiatric facilities.4

Yet another reason is that prescription drugs sometimes do things other treatments can’t, like fight infections or prevent heart attacks by reducing cholesterol or treat depression. While new drugs for conditions that were previously poorly treated or untreatable may increase total health care spending, the also have tremendous benefits in terms of better quality of life and increased worker productivity.

However, to many Americans drug spending may appear to be growing rapidly because patients generally pay a greater share out-of-pocket for drugs than for doctors visits or hospital stays.

Also, while patients notice the cost of the drugs they consume, they rarely calculate the economic value to them of the benefits they receive from drugs such as less lost work time or the lower expenses of daily living from keeping a chronic medical condition well managed with a drug therapy.


1 For more information see: Goldberg, Robert, Ten Myths About the Market for Prescription Drugs, Policy Report No. 230, The National Center for Policy Analysis, October 1999. This study can be found at:

2 Lichtenberg, F., The Effects of Pharmaceutical Utilization and Innovation on Hospitalization and Mortality, National Bureau of Economic Research, Paper No. 5418, January 1996.

3 Secondary and Tertiary Prevention of Stroke Patient Outcome Research Team: 9th Progress Report, Agency for Health Care Policy Research, September 1995.

4 Reid, W.H., New vs. Old Antipsychotics: The Texas Experience, Journal of Clinical Psychiatry, Vol. 60, Supp. 1, 1999.

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