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Economic Common Sense About Prescription Drugs
We have observed elsewhere that medical outlays in advanced 2000) provides some needed perspective on the public’s apparent economies can be expected to increase both in absolute terms and as alarm over drug expenditures. The following findings seem most a percentage of GDP as a nation’s wealth increases. The reason is that consumption for life’s other necessities is lower and that even 1. Total national expenditures on drugs ($91 billion) in 1998 are costly medical technology becomes relatively more affordable. De- still a small proportion (9%) of health care expenditures.
spite popular political notions that medical expenditures must be 2. Drug expenditures are, though, one of the fastest growing com- limited to some preordained level (just as GDP growth must be ponents of health spending. They were 5% of spending in 1995.
limited to some “sustainable” rate), there is no reason to suppose 3. As a percent of out-of-pocket expenditures by households for all any natural limits on what a free and affluent population chooses to consumer goods and services, drug expenditures are still very small (1.0% overall, rising to 2.7% for seniors).
There is, however, reason to suppose that greater efficiencies in 4. Of the hefty increases in drug expenditures since 1993, price the delivery of health care might be achieved even as health-care changes have contributed the least (18%), compared with in- spending in some categories increases. Today pharmaceutical therapy creased utilization of existing drugs (43%) and new more-ex- routinely provides effective treatment for many conditions that just pensive drugs replacing older cheaper drugs (39%).
a few decades ago required costly surgery, hospitalization, and the Thus the conventional view, which tends to equate increasing like. It thus should come as no surprise that while hospital stays drug expenditures with increasing drug prices, is far off the mark.
have dropped significantly over the past two decades, aggregate Chart 1 shows the average annual rates at which the prices of vari- outlays for prescription drug have increased markedly: in the aggre- ous categories of prescription drugs (patented name brand drugs, gate, the new drug therapies are cheaper and more effective.
generic drugs, and all existing drugs) rose between 1991 and 1998 It also is not surprising that the increased use of drugs has be- in relation to the rise in all medical and all consumer prices. As come one of the latest targets of political entrepreneurs. It seems shown, the overall average 6.7 percent rate of drug price inflation axiomatic that when the benefits of virtually any good or service was more than double that of the overall CPI—but well below the become widely apparent (as evidenced by sales in the marketplace), 15 percent rate at which expenditures increased. Moreover, the rate they are ripe for political exploitation. As others have noted, the of increase in the prices of generic and existing brand drug prices original Medicare legislation almost surely would have contained (6.5 and 4.3 percent, respectively) was even more moderate. The prescription drug benefits had today’s drug therapy been available difference between the increase in prices for existing drugs (4.3 then. Indeed, the public appetite for subsidized medical goods and percent) and that of all brand name drugs (8.8 percent) is the addi- services seems insatiable—but it is not without costs.
tional price rise each year associated with newly released, typically Among the most firmly established tenets of market economics better and more expensive, drugs. Drug expenditures increased more is that subsidies of any sort—either to producers or con-sumers—tend variously to increase demand, generate Chart 1: Average Annual Percent Change in Prescription Prices vs. CPI,
scarcities, and raise costs and/or prices and outlays. His- 1991-1998
torically, direct and indirect subsidies to producers havetaken many forms, including the creation of artificial shortages (e.g., crop reduction subsidies) and related price support schemes that have raised costs to consum- ers—from grain storage programs to punitive tariffs on any variety of imports. Consumer subsidies that increase demand have the same effect. No good or service is exempt from this circumstance. The outlays for pre- scription drugs, which for many decades have been heavily subsidized on the consumer side through both private and public third-party payment arrangements and on the producer side through regulation and indirect research subsidies—are an emphatic case in point.
Drug Expenditures: Rising Demand
A recent study by the Kaiser Family Foundation (July Table 1: Top 20 Prescription Drugs Ranked by Dollar Sales Volume, 1998*
common chronic conditions wouldseem to guarantee continued demand.
($24 billion of the total $91 billion).
small range of therapeutic categories.
*Sources: Drug Prescriptions Sales, sales growth, Type and Date of First Marketing: Prescription Drug Trends — A Chartbook,The Kaiser Family Foundation. 2000. Accessed at, July 2000. ** Source: Direct to Consumer Advertising, quoted in millions of 1998 dollars, from Med Ad News, various tables, June 1999. B=Brand. G=Generic.
N/A= Not Among the products directly advertised to consumers according to the Med Ad News data.
great strides in the last two decades.
rapidly than prices because newer, more expensive drugs became If effective drug treatments are developed to treat lower back pain, available and because the absolute number of people consuming the common cold, or unruly children, almost surely there will be pharmaceuticals of any kind also increased. In short, it has been the increased use of drugs rather than price changes that has mainly Despite the attention given such brand name drugs, it is impor- tant to note that they are not necessarily the most widely used drugs.
The surge in demand for pharmaceuticals shows no indication Table 2 shows the most-used drugs as measured by the number of of waning. Between 1992 and 1998, on a per capita basis the num- prescriptions filled per year. There are many older, generic versions ber of prescriptions dispensed increased from 7.3 to 9.6. And al- of drugs in this list compared to the dollar volume leaders in Table 1.
though the U.S. population grew only 6 percent, total prescriptions The usual life-cycle of a successful drug begins with marked sales dispensed increased by 37 percent. In large part, this change simply growth soon after introduction, and then generates high dollar-vol- reflects the aging of the population, inasmuch as the elderly con- ume sales until it is replaced by a competitor or its patent expires sume more prescription drugs than other age cohorts (in 1997 on (average effective drug patent life today is about 15 years) and average there were between one and three prescriptions for those lower-priced generic versions become available. Thus in the top aged 5-34, but between eight and twelve for those age 65 and Table 2: Top 20 Prescription Drugs Ranked by
That the overwhelming proportion of the population (77 Number of Dispensed Prescriptions, 1998*
percent of the non-Medicare and 69 percent of the Medicare population) has some form of prescription drug insurance cov- erage almost surely has also accelerated demand. As with all health expenditures, when a third party payer is inserted be- tween the patient and the health care service, there is a ten- dency to use more of the service. Ironically, even the shift to managed care types of coverage may have contributed to the surge in drug outlays. Demand for drugs is influenced by the number of physician visits (on average 60 percent of visits result in a prescription) which have increased under managed care programs the emphasize the importance of primary care visits. The rhetoric of managed care specifically encourages early and frequent primary care visits to manage chronic con- ditions before they reach critical stages. Such chronic condi- tions almost invariably are managed with drug treatments (al- though in many instances simple changes in lifestyle would accomplish the same purpose). That the current outcry about drug price “gouging” frequently emanates from the managed care planners themselves ought not conceal the fact that their own policies have contributed to the alleged problem. In any * Sources: Drug Prescriptions Dispensed, Type and Date of First Marketing: Prescription event, there is no indication that consumer demand for pre- Drug Trends — A Chartbook,The Kaiser Family Foundation. 2000. ** Source: Direct to Consumer Advertising, quoted in millions of 1998 dollars, from Med Ad News, various tables, June 1999. B=Brand. G=Generic. N/A = Not among the products directly advertised Rather, the availability of drug treatments for the most to consumers according to the Med Ad News data. Accessed at, July 2000.
“public funds” — say, food products obtained with food stamps or Chart 2: Generic Drugs as a Percent of Prescriptions
Social Security benefits. And (although many might secretly han- Dispensed and Percent of Total Annual Prescription Sales
ker to) no one has demanded a prohibition against the endless stream in Dollars, 1991-1998
50 of tasteless commercials promoting various non-prescription nasal sprays, laxatives, antacids, analgesics and the like. For those whoactually suffer from nasal congestion, constipation, indigestion, or whatever, the information provided through advertising may be ofincalculable value to targeted consumers seeking relief from their 30 symptoms—and well worth its incremental costs. It is difficult to see how prescription drugs differ in this respect. Rather, it is mainly Percent of Total Annual Prescription Sales in command economies that such advertising might be deemed genu- 20 inely superfluous. One is reminded of the popular Cold War comic routine caricaturing Soviet game-show life: at the commercial break, 10 a tobacco pitchman would light up, take a puff, and in a satisfied whisper intimate not only that this was the best cigarette brand in twenty drugs by sales volume, 75 percent have been on the market Moscow, it was the only cigarette brand in Moscow.
fewer than ten years (Table 1). Of the top twenty drugs by number A more arguable concern involves false or, more often, mislead- of prescriptions, only 45 percent have been on the market for fewer ing advertising claims about the products being pitched and/or un- ethical promotional campaigns directed at those with the power to Furthermore, although different drugs have come and gone, this prescribe. For example, even though it has been invoked endlessly cycle has persisted over the last ten years. As shown in Chart 2, the in behalf of any number of specific products (and technically may percentage of generic prescriptions has been rising over this period, be accurate), it is a matter of supposition that at some time or even as generic drug expenditures as a percentage of total drug another “four out of five doctors have recommended the ingredi- expenditures has fallen. Contrary to conventional wisdom, these ents” in virtually all patent medicines. And it stretches credulity trends suggest not an increase, but rather a drop in prices for the that this morning’s disheveled and nightgown-clad arthritis sufferer increasing proportion of (generic) drugs consumed.
has been transfigured into tonight’s ballroom sensation as a result This apparent circumstance would seem to bode well for the of consuming an undisclosed quantity of Brand X painkillers.
future. As shown in the accompanying box, many currently popular And so with advertising in general, whose main requirement is the brand name drugs will cycle through to generics in the next five emphatic absence of disinterest. Agencies that seek to promote their years. If the established prescription drug life cycle persists, it can clients’ products through even-handed appeals to reason soon go out be expected that drug prices almost surely will come under increas- of business. When questions of ethics are raised, in this arena one ing pressure without any counter-market intervention (insurers three- advertiser’s notions of honorable behavior become another’s barrier tier pricing systems for covered drugs already reflect the type of to competition. This behavior is scarcely new or extraordinary.
competitive buying pressure the drug companies are almost sure to Throughout the development of the market economy, the pre- face). As more and more drugs reach market “maturity,” doctors, sumption had been that consumers have the responsibility to evalu- patients, and insurers increasingly will be able to compare not just ate the claims of producers—however entertaining or convincing the value of the generic in relation to the brand name drug, but also the pitch. Until quite recently, most schoolchildren probably knew that of the older (less expensive) brand names in relation to the the meaning of caveat emptor.
The Regulatory Arm
Drugs and Advertising
The question at hand is whether such “classical” notions pertain Critics of the pharmaceutical industry observe that brand name to medical goods—most especially drugs, which might seem to drugs in the high dollar volume categories are also the most heavily differ in key aspects from many other market goods. Unlike cars, advertised drugs—as with, say, the hair loss reducer, Propecia, and cereal brands, or athletic shoes the consumption of drugs can pro- the anti-smoking agent, Zyban. Total advertising expenditures by drug manufactures in 1998 amounted to $8.3 billion, of which$7 billion was spent on media advertising and “detailing” (of- Box 1: Top Selling Brand Name Drugs
fice visits and samples) to health professionals. The remaining$1.3 billion was part of a relatively new effort, following a with Patents Expiring 2000-2005
relaxation of FDA guidelines in 1997, to promote pharmaceuti- cal products to the public through so called “direct-to-consumer” promotions (shown in the last column of Tables 1 and 2). Insofar as advertising costs are passed onto consumers as higher prices for the products advertised, it is alleged that, in effect, a propor- tion of publicly funded outlays for such drugs enriches Madison Avenue instead of promoting patient health—and therefore is a In this regard, a general observation may be useful: namely, that in free market economies advertising is a principal means by which information about different products and services is made available to consumers. It is of incalculable benefit in fostering competition and enabling informed choice among al- ternatives. No one objects to advertising for a myriad of non- pharmaceutical products that might be said to be purchased with Among illegal substances, for example, the drugs that produce can consumers, who in most other respects are the most demanding the biggest high can also be the deadliest. The individual consumer of purchasers of almost anything, in effect have relinquished indi- of a bad drug probably won’t be able to complain about the prod- vidual control over what would seem to be the most fundamental of uct—i.e., he will be dead. However, the word on the street quickly decisions—i.e., those involving health and life itself.
dampens sales. Given the volume of illicit drug sales, deaths attrib- It seems inescapable that in the near future at least, political utable to “bad product” (instead of consumer abuse) seem minus- “debate” will contest the amounts and types of various subsidies and cule. The police and health authorities in such instances probably regulations mainly to Medicare’s prescription drug consumers—but are among the last to be informed, and by the time they take action not the fundamental effects of the subsidies and regulations them- the drugs in question already are off the market.
selves. From a broad economic perspective, the differences in the Similarly, the most powerful of life saving prescription drugs Medicare prescription drug policies of the two main contenders in can also be life threatening (just read the reports on contraindications the current presidential campaign are minuscule—and a simple rec- of any of the bestsellers) and, again, the consumers of such products ognition that most other insureds already have prescription drug (i.e., dead patients) may not be in a position to complain about the coverage. Indeed, the vast majority of today’s prescription drug pa- results. But unlike the circumstance with illegal drugs, there is little tients would seem to enjoy, or at least not object to, their status as the direct feedback to consumers or their relations—who lack both the most “protected” of consumers. Most probably, demands for con- information and the decision-making authority even of illicit drug sumer drug subsidies will grow as effective drug therapies become consumers. In almost all circumstances, it is the doctor or the in- available for more and more clinical conditions.
surer who makes decisions about the best course of action. Con- The politicians cannot be expected to reveal that current trends sumers are told what they should (or are allowed to) “buy” and take actually favor lower prescription drug costs for the most widely the consequences. From a market perspective, the consumer feed- prescribed conditions. It is, after all, in the nature of most subsidies back (i.e., sales) that determines the fate of most products does not that they be proposed only after markets have demonstrated that apply in prescription drug transactions. The invitation to advertis- ing abuses seems obvious: when the target of advertising is second- References
party to the outcome of consumption (i.e., the doctor or insurer),almost anything goes.
The Kaiser Family Foundation, July 2000. Prescription Drug The received wisdom has been that only additional interven- Trends: A Chartbook. Accessed July 27 at tion—in this instance from the Food and Drug Administration—can overcome such market tendencies. Indeed, today pharmaceutical Earl P. Steinberg, Benjamin Gutierrez, Aiman Momani, Joseph manufacturers are subject to the most formidable regulatory quality A. Boscarino, Patricia Neuman, and Patricia Deverka. 2000. “Be- control and medical efficacy tests ever known. If advertisers flog yond Survey Data: A Claims-Based Analysis Of Drug Use And their products in unethical fashion, who cares? The regulators have Spending By The Elderly.” Health Affairs, March/April.
guaranteed that products approved for market are all good drugs (just The National Institute for Health Care Management and Educa- as the Securities and Exchange Commission certifies as bona fide all tional Foundation, 1999. Factors Affecting the Growth of Prescrip- publicly traded stocks). In broad perspective it seems ironic that Ameri- tion Drug Expenditures. Prepared by Barents Group LLC.
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