EBRI Issue Brief

Prescription Drugs: Coverage, Costs, and Quality

Jan 1, 1992 21  pages


  • Since 1965, prescription drugs have declined as a proportion of total health spending and currently represent less than 5 percent of national health expenditures. Although total expenditures for prescription drugs have increased more slowly than those for other medical services, the prices of these drugs have risen at a greater rate: 10 percent between 1989 and 1990.
  • The majority of prescription drug expenditures (72.4 percent) are paid out of pocket. However, third parties are increasing their share of prescription drug outlays and have experienced higher than average growth in their prescription drug expenditures, which rose from 21.9 percent in 1980 to 28 percent in 1989.
  • The distribution of prescription drug expenditures is an important policy concern. Whereas third parties pay for most other acute medical care needs, consumers pay most prescription drug costs directly. Individuals have reason to focus on drugs. More than 60 percent of all physician office visits recorded in a recent survey resulted in a recommendation for drug use. The price of some "high-tech" drugs can readily produce "sticker shock."
  • When employers provide health insurance coverage, the plans for full-time workers almost always cover prescription drugs. This benefit accounts for about 10 percent of plan costs for active employees and as much as 40 percent for plans covering Medicare eligible retirees.
  • Most employers cover prescription drugs under the same insurance plan that covers other medical expenses, although some cover these drugs through a separate carrier that administers insurance for prescription drugs and pays the claims. To contain costs, employees may be encouraged to obtain prescription drugs through mail order pharmacies or purchase generic drugs.
  • Lacking technical skills or knowledge of pharmacology, typical consumers may have difficulty assessing a drug's value and to a large degree rely on physicians to choose a product. The prescription drug industry consists of many competing pharmaceutical manufacturers, the largest of which has about 9.3 percent of the U.S. prescription drug market.
  • Public policy activity is focusing on government regulation of prescription prices, an issue that is likely to generate continued interest as policymakers look for ways to reduce health care costs. Pharmaceutical manufacturers perceive their markets as risky and set prices to obtain returns that they consider commensurate with their risks.