Key Issues > Prescription Drug Spending
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Prescription Drug Spending

The amount of money spent on prescription drugs has increased dramatically over the last two decades—which has serious implications for patients, the federal government, and others who pay for these drugs.

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Prescription drug costs are incurred by patients, private payers, and the federal government, including Medicare, Medicaid, and the Department of Defense (DOD).

Spending on prescription drugs (for both brand-name and generic drugs) has increased in recent years. For example:

  • Retail prescription drug spending was estimated to account for about 11 percent of total personal health care service spending in the United States in 2017, up from about 7 percent in the 1990s.
  • Estimated spending on retail and provider-administered drugs (such as those administered by physicians or hospitals) combined grew by about 25 percent from 2013 to 2017.

Factors that affect drug prices

Competition is one major factor that affects drug prices. Experts have questioned whether consolidation among drug companies, including mergers and acquisitions that result in fewer companies producing and marketing drugs, may reduce competition and lead to higher prices. There have consistently been about 300 reported mergers and acquisitions a year from 2006 to 2015.

Drug Companies’ Mergers and Acquisitions, 2006-2015

Drug  Companies’ Mergers and Acquisitions, 2006-2015 

Note: Merger and acquisition transactions were attributed to the largest 25 if the company Bloomberg designated as the “acquirer” in the transaction was one of the largest 25 drug companies by 2015 pharmaceutical and biotechnology sales revenue. Transactions attributed to all other companies included those for which Bloomberg designated a company other than one of the largest 25 as the “acquirer.”

In addition to companies consolidating, experts report that market pressures have driven some drug companies to move toward specialization in certain therapeutic areas—which also reduces competition.

Competition affects brand-name and generic drugs differently.

  • Brand-name companies producing drugs under patent or exclusivity protection have pricing power. When determining prices for new drugs, brand-name drug companies consider factors like the availability and price of alternatives and the potential market size.
  • Generic drugs compete with the brand-name or other generic versions of the same drug primarily through price—and the prices of generic drugs fall as additional manufacturers enter the market.

In addition to competition, other reasons why drug prices change include raw material shortages, the market demand for the drug, a backlog of new generic drug applications awaiting federal review, and consolidation among drug buyers (such as retail pharmacies).

Medicare drug spending

Medicare is the largest public payer for drugs, and it has seen high spending and large price increases for some drugs in two of its programs, Medicare Part B (which covers drugs administered by—or under the close supervision of—a physician in an outpatient setting) and Part D (its voluntary outpatient prescription drug program for self-administered drugs).

  • Medicare Part B drug expenditures increased at an average annual rate of 4.4 percent from 2007 to 2013, from $16.2 billion to $20.9 billion.
  • This growth was driven primarily by new Part B drugs. Total expenditures for new Part B drugs increased steadily from 2007 to 2013 (from $0.1 to $5.9 billion) as the number of new drugs and the number of beneficiaries receiving them increased.
  • Nearly two-thirds of new Part B drugs had expenditures per beneficiary in excess of $9,000 in 2013. Beneficiaries’ share of the cost of these drugs ranged from $1,900 to $107,000 per drug in 2013.
  • Generic drug prices declined overall under Medicare Part D between 2010 and 2015, but some established generic drugs had extraordinary price increases of 100 percent or more.

Established Drugs under Medicare Part D That Experienced an Extraordinary Price Increase, First Quarter 2010 to First Quarter 2015

Established  Drugs under Medicare Part D That Experienced an Extraordinary Price Increase,  First Quarter 2010 to First Quarter 2015

Note: A price increase of at least 100 percent from the first quarter of one year to the first quarter of the next is considered an extraordinary price increase. To be considered an established drug, a drug had to be in the Medicare Part D claims data for each quarter from the first quarter of 2009 through the second quarter of 2015 and meet certain other data reliability standards. A total of 1,441 drugs met these criteria.

Federal programs’ payments for drugs

In addition to the general factors that influence drug prices, federal programs may also pay different prices for the same drug. For example, a comparison of prices paid by DOD, Medicaid, and Medicare Part D in 2010 found that:

  • Drugs purchased for Medicaid were purchased at relatively lower average prices (after adjustments for refunds/rebates).
  • Lower prices paid by a program were largely due to these refunds/rebates from drug manufacturers. However, these price adjustments were not uniform across federal programs. For example, Medicaid’s federally mandated rebates apply to virtually all drugs, while DOD’s refunds apply primarily to brand-name drugs.

However, federal programs might not be able to achieve cost savings if they all obtained the lowest price available. For example, if a large federal program with many beneficiaries became eligible for the discounts available to other programs, manufacturers might choose to raise prices for these other programs to offset the discounts.

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