Paying for Pills: The Challenge Posed
by Escalating Prescription Drug Costs

By Mary R. Anderlik
Health Law & Policy Institute

Americans are growing ever more dependent on prescription drugs, and total expenditures are sky-rocketing. Cost and access issues are inextricably intertwined.

At the macro-level, several recent reports have focused on cost. A report sponsored by the National Institute for Health Care Management (NIHCM) found that in 1998, spending on prescription drugs accounted for 7.8% of total national health expenditures. Moreover, spending on prescription drugs is growing at more than twice the rate of overall health spending. From 1993 to 1998 alone, spending jumped $42.7 billion, with the annual percentage increase growing in each successive year. The NIHCM report is available via the organization’s website at

At the micro-level, the big issue is access, with stories of individual hardship prominent in the media. The elderly and the chronically ill tend to have the most prescriptions, yet the federal program that provides health insurance to the elderly and disabled workers, Medicare, does not cover drugs outside the hospital setting. Individuals who lack generous retiree health benefits and fail to meet eligibility requirements for Medicaid must either join a Medicare HMO that offers prescription drug coverage as a "sweetener," purchase a "Medigap" policy with drug coverage, pay out-of-pocket, or leave prescriptions unfilled. That set of options may soon shrink. On September 22, Vice President Gore released a report concluding that Medicare beneficiaries in HMOs can expect more and higher co-payments and increasing use of annual limits. For example, the number of HMOs imposing a $500 annual cap is expected to increase from 21% to 32%. HMOs argue that the cuts follow from the explosion in costs.

If we are to solve the cost and access problems, we must first attempt to understand what is going on. The NIHCM report suggests that the increase in spending reflects an increase in the number of prescriptions and price increases (primarily, substitution of higher priced drugs for lower priced drugs in the same therapeutic class). Factors fueling increases in utilization and price, and related to that, shrinking coverage, include the following:

Fast-track regulatory approvals. Over the past several years, the federal Food and Drug Administration (FDA) has made a concerted effort to speed the approval of new drugs. Further:

Massive spending on drug marketing. For 1998, the marketing budget for the U.S. pharmaceutical industry was an estimated $8.3 billion, just under half the total budget for research and development ($17.2 billion). Marketing increases demand and therefore utilization. Marketing costs must be recouped, contributing to price escalation. Marketing has two aspects: So far, responses from policy makers have focused on access, although many understand that increasing access without tackling the cost problem will exacerbate the cost spiral and may prove self-defeating. Most reform proposals are limited to the Medicare program. On June 29, President Clinton proposed optional prescription drug coverage under Medicare (creating a Medicare "Part D"). Most recently, on September 23, members of the House of Representatives offered more targeted proposals. The "Medicare Beneficiary Prescription Drug Assistance and Stop-Loss Protection Act of 1999," from Rep. Michael Bilirakis and Rep. Collin Peterson, would aid low-income Medicare beneficiaries (by providing federal matching funds for state drug assistance programs for those with incomes up to 200% of poverty) and Medicare beneficiaries with substantial drug bills (by providing federal stop-loss coverage that would kick in when a beneficiary’s out-of-pocket costs hit $1,500).

What about cost control? The Clinton proposal relies on group purchasing to keep costs in check. Rep. Sherrod Brown’s "Affordable Prescription Drug Act" is also a supply-side measure. It would require drug companies to disclose information that would enable regulators to evaluate pricing, and it would permit federal regulators to force licensing of patents to manufacturers of generic drugs under certain conditions. Another supply-side option would be to slowdown regulatory approvals of new drugs (except lower-cost generic drugs), or require a showing of significant therapeutic advance for approval of new drugs. On the demand side, the FDA might try to put the DTC genie back in the bottle, tightening up its guidelines. Another demand-side strategy would be to give HMOs and other health insurers greater discretion in medical necessity determinations, for example, endorsing denials of coverage for lifestyle drugs. Such a change could be made by federal or state governments or in the courts. None of these options is likely to please both drug companies and consumer groups.