Medication Costs and Reimbursements

According to the Centers for Medicare and Medicaid Services, national spending on prescription drugs in the United States totaled $85.2 billion in 1998, more than double the level of total spending in 1990. Spending for pharmaceuticals is expected to continue rising, by some estimates more than 10 percent annually until at least 2010.

This dramatic increase in prescription drug spending, much larger than that seen in other areas of medical care spending, has several causes. First, there has been a rapid increase in the number of new drugs entering the marketplace. From the early 1960s to the early 1990s, the annual number of new molecular entities (NMEs) receiving approval from the Food and Drug Administration (FDA) nearly doubled, from an average of fourteen in the 1960s to twenty-six in the early 1990s. By 1999, the annual number of NMEs approved had increased to thirty-nine. While some of these NMEs represent new treatments, many are intended as replacement drugs, possibly with fewer side effects. These new drugs are often more expensive than those they are intended to replace.

A second reason for the increase in prescription drug expenditures is the large amount of direct-to-consumer advertising for prescription drugs that has appeared since the FDA lifted its ban on such advertising in 1985. In response, pharmaceutical firm expenditures for direct-to-consumer advertisements rose significantly, from $55 million in 1991 to $1.8 billion in 1999 (National Institute for Health Care Management). This increase in advertising affects prescription drug expenditures in two ways. First, these advertisements lead to an increase in the demand for many name-brand prescription drugs. Second, the advertising expense increases the costs faced by pharmaceutical firms, which are in part passed on to consumers in the form of higher prescription drug prices.

Finally, the aging of the U.S. population is contributing to increased spending on pharmaceutical products. The number of individuals over age sixty-five has grown for the past several decades, and is expected to double between 2000 and 2050. This increases the number of individuals at risk for chronic and disabling conditions that often require prescription medications. For example, according to a study by the Department of Health and Human Services, in 1998, individuals age sixty-five and older accounted for forty-two cents of every dollar spent on prescription drugs even though they accounted for only approximately 13 percent of the population.

Each year, 87 percent of Medicare beneficiaries need to fill at least one prescription. The majority of Medicare beneficiaries (56 percent) use prescription drugs that cost more than $500 per year, and 38 percent use drugs that cost $1000 or more (Department of Health and Human Services). A 2000 study by John Poisal and George Chulis that examined prescription drug expenditures and insurance coverage of Medicare beneficiaries found that, in 1996, the average beneficiary spent $673 on prescription drugs.