Prescription drug costs, which rose by 15.7 percent in 2001, are the fastest rising component of medical expenditures and accounted for 16.7 percent of the total increase in health care spending that year. Americans spent more than $140 billion on prescription drugs in 2001—or about 10 percent of the nation's health bill, approximately the same level noted in 1960.
Nearly half of the nation's prescription bill (47.4 percent) was paid by private insurance. Individuals paid slightly more than 30 percent out-of-pocket. This is a reversal of the pattern in the early 1990s, when out-of-pocket payments were substantially greater than insurance reimbursement. The segment of the bill paid by government programs has remained stable over time.
More than three in five Americans fill at least one prescription annually. While the segment of the population not filling any prescriptions has remained largely constant, those who do take pills are filling more prescriptions. More than half of those older than 75 filled more than 15 prescriptions (including refills) annually. Adult prescription drug use is inversely correlated with income.
Most of the drug bill increase reflects increased consumption. The cost per pill is increasing at a much more modest rate. However, the impact of price increases on the increasing expenditures for prescription drugs has grown since 1996, when it accounted for 15.8 percent of the increase. In 2002, price increases were responsible for 29 percent of the total increase in prescription drug expenditures.
Drug costs interact with other medical cost components. Greater drug utilization may decrease hospital and other medical bills. Conversely, restrictions on drug utilization could lead to greater costs elsewhere. There is some evidence that newer drugs may be better than older drugs at preventing other health care costs.
Roughly half the prescriptions filled annually are for generic drugs. Such substitutes tend to enter the market priced at 70-80 percent of the relevant brand-name drug, with such prices falling to 40 percent or less as the market becomes more competitive. Many health plans actively encourage (or even require) the use of generic drugs.
Ninety-nine percent of employees covered by employment-based health insurance have prescription drug coverage, and more than 6 in 10 are in three-tier drug benefit plans. Employers and health plans are using tiered benefit structures and other means to encourage price sensitivity among their members and influence drug utilization.
On Dec. 8, 2003, the president signed into law the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (P.L. 108-173), which creates a voluntary prescription drug benefit for Medicare beneficiaries to begin in 2006. Retirees and policymakers are concerned that a drug benefit under Medicare may cause employers to drop retiree drug coverage, and the legislation includes an employer subsidy to encourage them to continue to provide it.
