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Federal government websites often end in. The site is secure. A background report prepared for the Department of Health and Human Services. A number of recent studies have examined the factors leading to the rapid growth of spending for prescription drugs in the late s. These studies have offered differing accounts of the relative importance of utilization and price changes, as well as the extent to which introduction of new drugs has driven spending growth. The studies show annual rates of per capita spending growth ranging from The time period reviewed also makes a difference. Spending growth accelerated in the last few years; studies that review a longer period show smaller annual growth. Finally, studies that examined a continuously enrolled population show higher growth because of population aging during the study period. Per capita prescription drug spending for a given population may increase over time for three basic reasons:. Estimates of the relative role of utilization and cost in driving spending depend on the units of measure used. If utilization is defined in terms of average number of prescriptions per enrollee, all the studies find that rising cost per prescription was a more important factor than utilization change. When days, instead of prescriptions, are used as the volume measure, utilization becomes the more important factor in spending change. Much of the increase in use and spending has resulted from the introduction of new brand-name drugs, some of which replace existing, less costly treatments and some of which help with conditions for which treatment was not previously available. NIHCM, which treats any drug introduced in or later as new, finds that new drugs accounted for two-thirds of spending. Other studies, which treat as new only those drugs introduced in the last half of the decade, find that they accounted for about 40 percent of spending. Using this narrower definition, then, most spending growth—about three-fifths-- was for medications that were already available by the mids. While the average number of prescriptions for these existing drugs rose in recent years, changes in cost per prescription were the more important factor in spending growth for older drugs, accounting for about 60 to 75 percent of the increase. Cost per prescription for existing drugs rose about 8 percent a year. About half of this increase was simple inflation—price increases for the same drug over time. New drugs not only contributed heavily to utilization growth, but were more costly than existing ones. The cost per prescription for drugs introduced in the last half of the s was about two-and-one-half times that of existing drugs. About half the spending increase attributable to new drugs was due to utilization, about half to the fact that they were more expensive. The figure presents a rough consensus estimate of the factors in spending growth over the five years The first five of these accounted for about half of all spending growth during the middle and late s. A recent study by Dubois et al. While this is true, drugs in these categories also showed significant price increases. What the study really shows is that drugs in these categories had unusually large increases in utilization, accompanied by cost changes comparable to those for drugs in other categories. Forecasts of future drug spending growth—by Merck-Medco, Express Scripts, and researchers at the University of Maryland—show continuing annual increases in the range of about 10 to 20 percent over the next several years. The University of Maryland researchers expect pipeline drugs to account for 40 to 50 percent of spending growth in the next five years. As in the past, much of the spending growth is expected to come in just a few categories. Central nervous system drugs, including psychotherapeutics and pain relievers, are projected to account for 24 to 29 percent of spending increases over the next few years. Cardiovascular drugs, including antihypertensives and cholesterol reducers, are projected to account for 15 to 26 percent of the increases. Department of Health and Human Services. The views presented here are those of the author and should not be attributed to the Department or its staff. Researchers who contributed to the studies reviewed in this report provided nformation on methods and supplementary data. Dubois, Protocare Sciences. Larry Bartlett of Health Systems Research, Joan Sokolovsky of the Office of the Assistant Secretary for Planning and Evaluation, and several of the researchers provided helpful comments on an earlier draft of this report. Spending for prescription drugs is one of the fastest-growing components of national health expenditures. As table 1 shows, drug spending grew at more than twice the rate of overall health spending between and The effect on private insurance payments has been even more pronounced. The share of private insurance spending devoted to prescription drugs nearly doubled; drugs accounted for over 40 percent of growth in private insurance spending during the period. Partly this is because managed care and other measures slowed spending growth in other medical care sectors. Increased use of prescription drugs may in fact have contributed to this trend, as medications substitute for other and more costly treatments. Still, there is concern about the rate of growth in drug spending and about the likelihood that costs will rise further as new drugs now in development become available. Table 1. A number of studies have analyzed recent trends in spending for prescription drugs, for the population as a whole or for specific insured groups. These studies have offered somewhat different accounts of the relative importance of utilization and price changes, as well as the extent to which introduction of new drugs has driven spending growth. Some of the variation in study results is attributable to the population studied, the time period considered, or methodology; some of the variation is merely apparent, stemming from differing definitions of components of spending or choices about how to present the results. This report compares the findings of several widely distributed studies, highlights the key points on which they agree or disagree, and attempts to explain the differences in study findings whenever possible. It is not the aim of this report to evaluate the quality or validity of the different studies. They were produced for different purposes or audiences and use different methods accordingly. Nor will there be any attempt to address broader questions, such as whether drugs are appropriately priced, or whether drug spending represents a good value in terms of improved health or quality of life. The aim is merely to try to develop a coherent picture of what has been happening, without evaluating whether what has been happening is good or bad. Two additional studies will be referred to in this report, but cannot be directly compared to the four listed above. Dubois et al. Mullins, Palumbo, and Stuart project future spending trends on the basis of recent experience, but provide only limited analysis of recent spending growth. Table 2 compares key features of the data used in the four studies. The time periods examined differ; the effects will be considered below. There are also important differences in the populations studied and in methods of estimating spending. The NIHCM study uses data from an audit of a sample of retail pharmacies and other retail outlets, weighted to reflect the whole universe of retail drug sales; its figures thus reflect drug use by people with and without insurance coverage for prescription drugs. The other three studies use data for a sample of insured people in health plans whose prescription drug benefits are administered by a pharmaceutical benefits manager PBM. These are chiefly active workers, retirees, and dependents in employer groups; individual purchasers of nongroup coverage may be included if any of the carriers contracting with the PBMs sell coverage in the nongroup market. Express Scripts looks at enrollees in a subset of the groups they serve, selected from among groups that are able to provide valid monthly enrollment counts. The particular enrollees examined in the starting year may be different from those examined in the final year. In reporting costs for prescriptions, three of the studies use the actual retail transaction price: the total amount paid to the retail pharmacy, including any insurer payment and the amount paid by the patient. These prices do not reflect the rebates that manufacturers often grant to insurers, employers, or PBMs, because payment of these rebates is a side transaction not reflected in the payment to the retail pharmacy or other outlet. On the other hand, these prices do reflect any discounts granted by the retail pharmacy itself—as, for example, when a pharmacy negotiates with a PBM a fixed mark-up that is lower than the mark-up it charges to cash customers. The Express Scripts study does not use actual transaction prices. Instead it is the published wholesale price suggested by the manufacturer of the drug. The studies show very different rates of growth in total prescription drug spending. This is partly attributable to differences in the time periods and populations studied. As a basis for comparison of the studies, it is helpful to look at two estimates of overall retail prescription drug spending for the entire population: data from IMS Health pharmacy audits and estimates from the National Health Expenditures NHE series calculated by the Health Care Financing Administration. The main difference is that the NHE figures are net of the estimated amounts of rebates paid by pharmaceutical manufacturers to insurers and other third-party purchasers, such as state Medicaid programs, while the IMS figures reflect retail transaction prices. As none of the studies considered here takes account of manufacturer rebates, the IMS data provide a better benchmark. Note that the NHE figure is a preliminary estimate derived from data; the final estimate, when available, is expected to show a rate of increase closer to that shown by IMS. Table 3. Per capita increase based on changes in average civilian population, U. Census Bureau. Table 4 compares the annual rate of spending growth reported in the studies to the IMS per capita growth rate for the period of each study. Note that all the studies except NIHCM report spending per member year PMY ; they thus correct for changes in the size of the study population, though not for population aging, an issue to be discussed below. The resulting growth rate is quite close to that shown by IMS for the same time period. It has been shown that, in a single year, people who have drug coverage for the entire year receive more prescriptions, and for more costly medications, than people without coverage or covered for only part of the year DHHS It seems likely that spending by the insured would also rise more rapidly from year to year, because they are more likely than the uninsured to receive new and more costly medications. Trends in drug utilization and spending over time for the insured and uninsured have not been investigated for the entire population. However, data from the Medicare Current Beneficiary Survey do show that, between and , per capita drug spending by beneficiaries without drug coverage rose 7. Two other factors might possibly play a role:. Because older people incur higher prescription drug costs than younger ones, aging of the population during the period being examined would account for some part of the observed overall spending increases. It is estimated that aging of the US civilian noninstitutionalized population would, if utilization and cost by age remained constant, have resulted in a per capita spending increase of at least 2. The authors estimate that 3 to 5 percentage points of the observed In the Merck-Medco study, covering through , every participant aged four years. In the Express Scripts groups, on the other hand, some older workers leave without continuing in the group as retirees and are replaced by younger workers. Express Scripts estimates that the average age of its population may increase by only three to six months for each year in its study. This could account for much of the difference in spending growth between Express Scripts and the other PBMs. Per capita prescription drug spending for a given population may increase over time for a number of reasons:. The first four factors are all related to volume or quantity: more people are getting more drugs, in larger supplies and with higher dosages. The fifth factor, change in unit price over time for the identical medication, is what is ordinarily meant by inflation. The last factor, change in the mix of drugs received, has had an important effect on the average cost of prescriptions: people are typically getting drugs with higher prices than they were some years ago. New medications are not simply more costly than older ones. They may be more effective or have fewer side effects; some may treat conditions for which no treatment was available. Each of the studies reviewed here attempts to deal with this problem by distinguishing between old drugs—those available at the start of the study period—and new drugs, those introduced during the study period. However, changes in mix do not represent simply a shift in use from older drugs to newer drugs. There are also changes in the mix of older drugs—for example, when a drug loses patent protection and generic competitors are introduced. Only Express Scripts separately measures these changes. Leaving aside the problem of mix, each study presents its information in a different way, and each to some extent collapses the various factors in spending increases, conflating volume, price, and mix changes. For example, NIHCM reports—separately for old and new drugs—changes in utilization number of prescriptions and in price cost per prescription. The utilization measure is equivalent to growth in users times growth in prescriptions per user, while the price measure merges changes in days per prescription, strength, and mix with changes in unit price. Merck-Medco reports changes in users, days per user, and cost per day. There is thus no simple way of comparing the results of all four studies. This report will provide a variety of comparisons, each including as many of the studies as possible. Even to produce these comparisons, it has been necessary to recalculate the data provided in the studies, because of differences in presentation. Because these recalculations rely on published figures that have been rounded, they are subject to some degree of error. All recalculated numbers are presented in bold face; they should be read as approximations only for the purpose of comparison and should not be cited separately. The following discussion will begin with some gross measures for all drugs combined, before considering the effects of changes in mix of old and new drugs. Table 5 compares the annual increase in prescriptions per capita and cost per prescription in three studies. IMS Health data for comparable periods are again provided as a benchmark. Again, the differences may be attributable to generosity of insurance coverage and enrollee characteristics. Table 5. Counts of prescriptions are not a very good measure of volume, because the supply of medication in each prescription changes over time. As table 6 shows, using days as the volume measure markedly increases the share of spending growth attributable to utilization. Both show the utilization change as accounting for about three-fifths of growth in per capita spending. It should be noted, however, that the two studies that allow counts of days are also the studies that follow a constant cohort, which ages faster than the general population. Because aging is likely to affect utilization more than unit cost, table 6 probably overstates the share of spending growth attributable to utilization. For the general population, the truth is likely to fall somewhere between table 5 and table 6. Although most recent discussions of spending growth for prescription drugs emphasize the role of new drugs, utilization of existing drugs has also increased, and the price of these drugs has risen over time. This section compares the results of three of the studies. The relative importance of old and new drugs in driving spending increases obviously depends on where one sets the cut-off point between old and new. Table 7. If Express Scripts had used the same method, counting all drugs introduced in the seven years through as new, new drugs would similarly have accounted for 32 percent of its spending total. Table 8 shows annual growth in prescriptions for old drugs and in cost per prescription. The much slower growth in NIHCM may well be related to the fact that it classes many more drugs as new. Those treated as old were, on average, introduced earlier than the larger group of drugs treated as old in the other two studies. This may mean that they are therefore more likely to face competition, in the form either of generic equivalents or more recently introduced drugs in the same therapeutic categories, restraining price growth. It may also mean that they have reached their maximum utilization rate for their target populations. Table 8. Express Scripts provides the fullest breakdown of factors contributing to changes in cost per prescription for older drugs, as shown in table 9. The total annual change is slightly different from that shown in table 8, because of rounding error. Much of the rest is attributable to changes in mix—substitution of more costly old drugs for less costly old drugs. Table 9. Once again, it should be noted that Express Scripts uses AWP as a price measure, rather than actual retail transaction prices. However, its inflation estimate of 3. The CPI does use retail transaction prices and uses a more or less constant market basket of existing drugs for the purpose of indexing. Table New drugs have contributed heavily to recent growth in overall utilization, and their cost is much higher than that for older drugs. Express Scripts and Merck-Medco data allow estimates of cost by the year drugs were introduced, as shown in table The price ratios in Express Scripts are somewhat lower than in Merck-Medco. Note that the Express Scripts cost is per prescription, the Merck-Medco per day. This could account for higher price ratios when days rather than prescriptions are the unit. Displaying the relative contribution of new drug use and price to overall spending increases is problematic. This seems unsatisfactory, because it merges the effects of the higher prices of new drugs and general price inflation along with the unmeasured volume factors of days supply and strength. For this report, a different method has been adopted. The utilization effect is defined here as the amount that would have been spent on new drugs in or depending on the study if the cost per prescription for new drugs were the same as that for older drugs in the same year. The cost effect, a residual, is the additional amount of spending attributable to the fact that newer drugs cost more than older drugs in or This is not entirely satisfactory, either, because the prices of existing drugs may be affected by the competitive changes resulting from introduction of new drugs in the same therapeutic category. The complex interplay of old and new drug prices is suggested by the findings of Dubois et al. Still, the figures have to be shown somehow; the decision on presentation here is necessarily arbitrary. Table 12 shows the resulting estimates for the three studies. This is the reverse of what was shown for older drugs in table 8. All of the studies find that spending growth is heavily driven by spending for specific types of drugs or therapeutic categories. As is true of spending growth in general, growth in a particular therapeutic category reflects both volume and price changes, with the importance of each varying by category. Growth in utilization may stem from changes in medical practice—such as the increase in prescriptions for cholesterol reducers. Or it may stem from consumer demand that may be partly fueled by direct-to-consumer advertising or other publicity for new treatments, as is likely the case for antihistamines or fungicides. NIHCM found that the ten drugs with the highest spending for direct-to- consumer advertising in accounted for 12 percent of total prescription drug spending in that year. Price changes may reflect the introduction of new drugs in a category that replace less costly older drugs. However, price changes for existing drugs also vary by category. Express Scripts reports an average price change for existing drugs of 5. By category, price changes ranged from as little as 2. One detailed recent analysis of factors in spending growth for specific therapeutic categories is a study by Dubois et al. Table 16 shows the components of this growth for the seven categories. Note that a component can be shown as making a negative contribution to total growth if the value for that factor declined over the period. In the asthma category, for example, the study found that prices for new and established drugs and the use of established drugs went down between and New drug prices are the price relative to the prices for established drugs. Unlike the other studies reviewed here, the data sets include information on use of other medical services as well as prescription drugs. Accordingly the study attempts to identify enrollees whose conditions or diagnoses made them candidates for use of prescription drugs in a given therapeutic category, as well as those who actually received drugs. Prevalence is the growth in the proportion of enrollees thought to be candidates for a drug class. For every category, the study reports that volume is much more important than price in explaining spending increases. For antihyperlipidemics cholesterol reducers , volume explains the entire change; the price of both new and established drugs at the end of the study period was lower than that for established drugs at the start of the period. NIHCM data indicate that the seven categories studied accounted for about 33 percent of total drug spending in The question necessarily arises, whether what happened in these categories is representative of what happened for prescription drugs in general. For the study categories, NIHCM shows utilization changes accounting for 69 percent of spending growth and change in cost per prescription for 31 percent. For all remaining drugs, NIHCM shows utilization accounting for only 41 percent of spending growth and cost changes for 59 percent. This strongly suggests that the categories studied by Dubois et al. This is not to say that the categories selected for the Dubois study were the wrong ones to examine; they account for 45 percent of all the spending increase found by NIHCM. Rather, the comparison suggests that different trends are affecting spending in different categories. A few show dramatic increases in utilization, accompanied by unit cost increases that are on average comparable to those for other drugs; the effect was to move their share of total drug spending from about 24 percent in to 33 percent in The rest, on average, show more modest utilization change and roughly the same amount of price change. The findings are currently undergoing revision and were not available for inclusion in this report. Annual growth in prescription drug spending is expected to continue in the next few years at the double-digit levels observed in the late s, because of population aging, price inflation, and the effects of continued introduction of new drugs. The Express Scripts and Merck-Medco reports both include forecasts of coming increases for populations resembling their client base. Table 18 compares the Express Scripts and Merck-Medco forecasts. Express Scripts predicts that pharmaceutical manufacturers will restrain price increases in the next few years, chiefly in response to increased scrutiny; Merck- Medco does not share this conjecture. Note: Merck-Medco estimate is for a population with an average age of 50 and 'limited benefit management interventions. The University of Maryland projects that total drug spending will increase by 15 percent in each of the years through The study estimates that prices will rise 9 to 11 percent per year, while use will rise 5 to 7 percent. This reflects an expectation that the higher utilization increases of recent years will not continue. Instead much of the cost increase will come as new drugs replace older drugs for current utilizers. All three studies expect new drugs to continue to be an important factor in spending growth. Among the top classes of pipeline drugs are expected to be biotechnology drugs, cardiovascular drugs, antidepressants, anti-cancer drugs, and drugs for erectile dysfunction. Some of these will replace existing therapies; others will treat conditions for which no medication now exists. Merck-Medco estimates that new drugs will account for about 40 spending of future spending growth. Most growth, then, is still expected to stem from increased spending for existing drugs. This includes continued growth in the use of recently introduced drugs whose market is not yet saturated, as well as changes in the mix of older drugs prescribed. Merck-Medco suggests that another important factor is likely to be the marketing of existing drugs in new forms, such as inhalants or extended- release oral dosages. As in recent years, much of the spending growth is likely to occur in a few therapeutic categories. Merck-Medco expects that five groups of drugs will account for 80 percent of spending growth, as shown in table Projections by Express Scripts show a somewhat different pattern for the years , as shown in table But Express Scripts also expects anti-asthmatics and other respiratory drugs, along with cholesterol reducers and sex hormone therapy, to account for much of the spending growth. Some of the differences in the forecasts reflect the different populations served by the two PBMs. For example, Express Scripts attributes a much smaller share of total spending growth to antidiabetics, because these drugs are used chiefly by the elderly, who are underrepresented in the Express Scripts sample. Dubois, A. Chawla, C. Neslusan, M. Smith, and S. Mullins, F. Palumbo, and B. Updated figures downloaded from www. Neumann, E. Sandberg, C. Bell, P. Stone, and R. Census Bureau, civilian population estimates downloaded from www. As these are heavy users of prescription drugs, the estimate probably understates the effects of aging on drug spending. This might make a difference in growth rates if turnover rates were different in the base and final years for the study. For an overview of the difficulty in making such assessments, see Neumann, et al. The effects are uncertain. Carrying forward into might have led to a slightly higher share of spending growth attributed to cost. Per capita prescription drug spending for a given population may increase over time for three basic reasons: Volume. A few therapeutic categories saw especially large increases in spending. These included: Cardiovascular, especially cholesterol reducers and antihypertensives Gastrointestinal, especially anti-ulcerants Psychotherapeutics, especially antidepressants Anti-infectives Hypoglycemics or anti-diabetics Antihistamines Asthma medications Pain relievers The first five of these accounted for about half of all spending growth during the middle and late s. Growth in National Health Expenditures and Spending for Prescription Drugs, Annual growth in spending Prescription drugs as share of total spending National health expenditures Prescription drugs Total 5. Data cited in this report were supplied by the researchers and are different from those in a preliminary presentation of study findings at a conference in Princeton, NJ, in May Express Scripts. Table 2. Differences in reported spending growth Table 4 compares the annual rate of spending growth reported in the studies to the IMS per capita growth rate for the period of each study. Table 4. Two other factors might possibly play a role: The PBM groups might be in plans that have especially generous prescription drug benefits, which could promote faster growth in utilization and spending. The effects of having generous coverage might outweigh the effects of the cost containment measures often adopted in such plans, including use of formularies and promotion of generic substitution, negotiated discounts with pharmacies, use of mail order pharmacies, and other practices associated with managed care. Each PBM is serving numerous groups, which may offer different levels of drug coverage and use different cost control measures. For example, some may have closed formularies, while others cover any drug. A differing mix of such groups in the different PBMs could explain some of the variation in spending growth. If spending for older people rose faster than spending for younger ones, this could affect the overall averages. Growth in prescriptions and cost per prescription Table 5 compares the annual increase in prescriptions per capita and cost per prescription in three studies. Growth in users, days per user, and cost per day Counts of prescriptions are not a very good measure of volume, because the supply of medication in each prescription changes over time. Table 6. Growth in spending for old drugs Table 8 shows annual growth in prescriptions for old drugs and in cost per prescription.
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