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 12% of total personal health care service spending in the United States in 2019 (up from about 7% in the 1990s).
The U.S. spends more than other countries for prescription drugs. For example, in 2020, for 20 selected brand-name prescription drugs, estimated U.S. prices paid at the retail level by consumers and other payers, such as insurers, were more than two to four times higher than prices in Australia, Canada, and France. Additionally, consumers’ out-of-pocket costs for prescription drugs varied across and within all four countries but likely more within the U.S. and Canada where multiple payers had a role setting prices and designing cost-sharing for consumers, and not all consumers had prescription drug coverage.
Estimated U.S. Net Prices and Selected Comparison Countries' Gross Prices at the Retail Level for Two Selected Drugs and Package Sizes, 2020
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 the prices paid by the Department of Veterans Affairs (VA) and Medicare Part D found that VA paid, on average, 54 percent less per unit for a sample of 399 brand-name and generic prescription drugs in 2017 as did Medicare Part D, even after accounting for applicable rebates and price concessions in the Part D program. Several program features may contribute to the differences between VA and Medicare Part D, including VA’s access to discounts defined by law that are not available to Medicare Part D plans.
Average Per-Unit Net Prices Paid by Department of Veterans Affairs and Medicare Part D for Selected Drugs, 2017
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.
Spending for Medicare Parts B and D was associated with drugs with direct-to-consumer advertising, which includes drug manufacturer advertising on television and media to promote the use of their drugs. Medicare Part B, Part D, and beneficiaries spent $560 billion on drugs from 2016 through 2018, $324 billion of which was spent on drugs with direct-to-consumer advertising. In addition, some of the top 10 drugs with the highest Part B or D expenditures were also among the top 10 drugs in advertising spending in 2018. Specifically, among the top 10 drugs with the highest Medicare Parts B or D expenditures, four were also among the top 10 drugs in advertising spending in 2018: Eliquis (blood thinner), Humira (arthritis), Keytruda (cancer), and Lyrica (diabetic pain).