Pfizer Public Policy: Drug Spending and Utilization

Spending on pharmaceuticals has grown steadily over the past half-century, as it has for all types of health care. The main reason for this trend is simple: more people are taking medicines today than did previous generations.

Pharmaceutical companies have been creating new products that treat diseases and conditions that were previously untreatable or for which previous treatments were inferior. These new options mean more people can now better manage or cure their illness. People are also living a lot longer than they used to, thanks to modern medicine and healthier lifestyles. As they age, they are looking to innovative medicines to help them treat their age-related health problems.

For health care payers - be they employers, health plans, governments, or consumers - the rise in pharmaceutical utilization and the accompanying rise in spending begs a question: "Is this spending worthwhile?"

Pfizer believes that it is. Medicines are one of the best values in health care - both for patients and for health care payers.

Key Points

• Pfizer believes that prescription drugs are one of the best values in health care - both for patients and for health care payers - because they enable people to live longer and healthier lives, and reduce the need for other types of medical care.
• Despite increases in drug utilization, drug costs are still only about ten cents of the nation's health care dollar.¹
• For consumers, however, prescription drugs are one of the most visible and rapidly expanding components of health car spending. One reason for this trend is that health plans have been shifting a greater portion of the cost of prescriptions to their members, and have been increasing co-pays at rates higher than the rise in the prescription prices.
• New medicines are an excellent investment compared to older ones. A growing number of studies are confirming the value of new medicines to patients and society, and are showing that newer medicines can often actually save money in terms of total health care costs.

Innovative medicines help people live longer and healthier lives. They reduce the need for other types of medical care that might be more costly or more invasive, such as hospitalizations or surgery. Medications - such as antibiotics, used to treat bacterial infections, or triptans, used to treat migraines - enable people to go to work when they might otherwise have to stay home, thus increasing worker productivity.

While there is concern about increasing drug spending in this country, it's interesting to note that drugs are still a small portion of overall health care spending, accounting for only about 10 percent of all health care dollars, as shown in Chart 1. If drug spending were taken out of the equation, it would have little impact on reducing overall health care spending, as shown in Chart 2.

For consumers, however, pharmaceuticals represent a large and growing portion of their health care spending, well beyond the national average of ten percent. A key driver behind this trend is that more and more health plans and employers are requiring their members pay an increasingly large share of the cost of pharmaceuticals. Co-pays, in particular, are a concern, especially since, on average, they've been climbing at a rapid pace relative to the underlying prices of pharmaceuticals. All types of prescription drug co-pays - brand name drugs as well as generics - have been increasing at a much faster rate than the average increase in the prices of these products. As illustrated in Chart 3, while pharmaceutical prices only increased by 4.3% annually between 2000 and 2004, consumer co-pays rose by much more: 9.3% for generic drugs, 12.7% for brand name drugs "preferred" by the health plan, and 18% for "non-preferred" brand name drugs.

An example of how drugs can lower mortality rates and save the health care system money can be seen in the impact of the introduction of new HIV therapies in the mid-1990s. Deaths from AIDS dropped dramatically shortly after new drugs came on the market, as shown in Chart 4. In addition, while spending on drugs to treat AIDS patients increased, overall per-patient health care costs decreased dramatically as the drugs reduced the need for other more-expensive health care services.

The introduction of pharmaceuticals to treat heart conditions has also been shown to have decreased the likelihood that a person will die of a heart attack. Economists at Harvard and Stanford have demonstrated that pharmaceutical treatments (mainly aspirin therapy, thrombolytics, ACE inhibitors, and beta-blockers) accounted for about 50 percent of the reduction in US heart attack mortality rates between 1975 and 1995. Over that time period, the chance of dying within 30 days of a heart attack dropped from 27 percent to 17 percent. The reduction implies that over 50,000 people per year who would have died within 30 days of a heart attack in 1975 now survive.²

Newer medicines offer some of the greatest benefits to patients. While newer medicines sometimes cost more than older ones, growing number of studies confirm the value of newer medicines to patients and society, and show that newer medicines can often actually result in health care savings.

For example, a study by Frank Lichtenberg, a Professor of Business at Columbia University, finds that patients using on average newer drugs were significantly less likely to lose workdays due to illness than those patients using older drugs.³ Lichtenberg also found that while the use of newer medicines increased drug costs, overall health care spending decreased when newer drugs were used primarily due to decreased hospital use. On average newer medicines increased drug costs by $18, but reduced hospital and other non-drug costs by $129, meaning each additional $1 spent on newer pharmaceuticals saves the health care system $7 compared to what would have been spent if that patient had used an older drug.

¹ Centers for Medicare and Medicaid Services. Historical National Health Expenditures by Type of Service and Source of Funds: Calendar Years 1960-2005. Table from nhe05zip file. Available at: http://www.cms.gov. Accessed on Jan. 9, 2007

² Centers for Medicare and Medicaid Services. Historical National Health Expenditures by Type of Service and Source of Funds: Calendar Years 1960-2005. Table from nhe05zip file. Available at: http://www.cms.gov. Accessed on Jan. 9, 2007.

³ 1) – Centers for Medicare and Medicaid Services. Historical National Health Expenditures by Type of Service and Source of Funds: Calendar Years 1960-2005. Table from nhe05zip file. Available at: http://www.cms.gov. Accessed on Jan. 9, 2007.
  2) – Catlin, Aaron, et al. National Spending In 2005: The Slowdown Continues. Health Affairs. January/February 2007;426-153.

⁴ Consumer Price Index (Rx Drug CPI-U) contains prices for all prescription medications and medical supplies (urban consumers). Source: CPI data from Bureau of Labor Statistics (Available at: http://data.bls.gov/cgi-bin/dsrv); copay calculations based on Kaiser Family Foundation data and Health Research & Education Trust, Employer Health Benefit 2006 Annual Survey.

Last Updated September 2007