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.
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 nearly 11% of total personal health care service spending in the United States in 2018 (up from about 7% in the 1990s).
Factors that affect drug prices
Competition is one major factor that affects drug prices. There have consistently been about 300 reported mergers and acquisitions among drug companies every year from 2006 to 2015. 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. 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.
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.”
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, they can consider factors like the availability and price of alternatives and the potential market size. Generic drugs, on the other hand, compete with the brand-name or other generic versions of the same drug primarily through price—and the prices of generic drugs generally fall as additional manufacturers enter the market. However, the lack of competition, among other factors, have led to increased prices for certain generic drugs.
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).
Federal 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.
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 D is a voluntary outpatient prescription drug program for self-administered drugs. Gross Part D expenditures, which reflect what was paid to the pharmacy by Part D plans and beneficiaries, increased 20% from 2014 through 2016 (from $120.7 billion to $145.1 billion). Once rebates and other price concessions from manufacturers and others were taken into account, net Part D expenditures increased 13% (from $103.2 billion to $116.1 billion). Additionally, Part D brand-name drugs sold in specialty pharmacies received fewer rebates and other price concessions than those sold in retail pharmacies.
Medicare Part D Expenditures, 2014-2016
While most Medicare Part D spending and rebates were for brand-name drugs, generic drugs represented most of the prescriptions that Medicare beneficiaries filled. Generic drug prices declined overall under Medicare Part D between 2010 and 2015 (though some established generic drugs had extraordinary price increases of 100% or more).
Medicare Part B covers drugs administered by—or under the close supervision of—a physician in an outpatient setting. Part B drug expenditures increased at an average annual rate of 4.4% 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 these 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. Additionally, 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.