Prescription Drugs: Issues of cost, Coverage, and Quality

April 1999
EBRI Issue Brief #208
Paperback, 22 pp.
PDF, 87 kb
Employee Benefit Research Institute, 1999

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Executive Summary

  • This Issue Brief closely examines expenditures on prescription drugs, and discusses their potential to substitute for other types of health care services. In addition, it describes employer coverage of prescription drugs, direct-to-consumer advertising of prescription drugs, and potential legislation affecting the prescription drug market.
  • Prescription drug expenditures grew at double-digit rates during almost every year since 1980, accelerating to 14.1 percent in 1997. In contrast, total national health expenditures, hospital service expenditures, and physician service expenditures growth rates decreased from approximately 13 percent in 1980 to less than 5 percent in 1997.
  • Private insurance payments for prescription drugs increased 17.7 percent in 1997, after growing 22.1 percent in 1995 and 18.3 percent in 1996. This growth in prescription drug payments compares with 4 percent or less overall annual growth in private insurance payments for each of those three years.
  • From 1993 to 1997, the overwhelming majority of the increases in expenditures on prescription drugs were attributable to increased volume, mix, and availability of pharmaceutical products. In 1997, these factors accounted for more than 80 percent of the growth in prescription drug expenditures.
  • A leading explanation for the sharp growth in drug expenditures is that prescription drugs are a substitute for other forms of health care. While it is difficult to determine the extent to which this substitution occurs, various studies have associated cost savings with the use of pharmaceutical products in treating specific diseases.
  • Evidence suggests that more appropriate utilization of prescription drugs has the potential to lower total expenditures and improve the quality of care. Also, some studies indicate the U.S. health care system needs to improve the way patients use and physicians prescribe current medications.
  • Prescription drug plans offered by employers are likely to undergo changes to ensure that only the most efficacious drugs are covered. Anecdotal evidence suggests that copayments for prescriptions are going to increase. Some health plans are including prescription drug costs in their capitated payments to physicians. Furthermore, prescription drug plans are expected to use formularies more aggressively.
  • In 1996, an average 5.47 outpatient prescriptions were written for those ages 55–64, compared with more than eight for those age 65 and older. Inevitably, this translated to significantly more spending for prescription drugs by the elderly. In 1994-1995, the average elderly individual (age 65 or older) spent $558 on prescription drugs, while the average 55-64-year-old spent $355.
  • While prescription drugs are showing sharp price increases, they are also becoming more important in the treatment of many diseases. Consequently, both employers and policymakers must carefully balance the design and cost of a drug benefit so that continual innovation is preserved and the benefit can remain affordable and effective.