Projecting Future Drug Expenditures-2003

Nilay D. Shah, James M. Hoffman, Lee C. Vermeulen, Robert J. Hunkler, Karrie M. Hontz


Am J Health Syst Pharm. 2003;60(2) 

In This Article

Abstract and Introduction

Drug expenditure projections for 2003 and factors likely to influence drug costs are discussed.

The United States continues to face the challenge of increased growth in health expenditures, and drug expenditures are continuing to increase faster than the growth in total health care expenditures. These increases can be largely attributed to an increase in the average age of the U.S. population and technological advancement. On the basis of price inflation and non-price inflationary factors, including increases in volume, shifts in patient and therapeutic intensity, and expected approval of new drugs, a 10-12% increase in drug expenditures in 2003 for the inpatient setting and a 13.5-15.5% increase for ambulatory care settings are forecasted. While few new drugs are expected to greatly influence expenditures in 2003, the continued diffusion of recently approved drugs such as drotrecogin alfa and nesiritide will have a dramatic impact on total drug expenditures and must be carefully considered in the budgeting process. An agent likely to have a significant impact on HIV treatment is enfuvirtide, the first in a new class of antiretrovirals (fusion inhibitors), but its high cost ($10,000-$15,000 per year) may limit patients access to this medication. An expanded user's guide is provided to assist the reader in appropriate application of this information in the drug budgeting process.

Technological, demographic, and market-based changes and changes in public policy will continue to influence pharmaceutical expenditures in the coming year. An understanding of the overall drivers of medication expenditures and vigilance in monitoring pharmaceutical innovation are critical in the effective management of these resources.

Prescription drug expenditures have continued to increase in the United States over the past decade across all settings. Prescription drug cost containment has become a significant issue of discussion and concern for policymakers, health care administrators, health care practitioners, and patients. As in 2001 and 2002, issues such as patent reform, prescription drug advertising, improved access to lower cost drugs, and Medicare prescription drug benefits will continue to be at the forefront of congressional discussions in 2003. While prescription drug expenditures made up only 9.4% of total health care costs in 2000, spending on prescription drugs increased by more than 200% between 1990 and 2000, representing the most influential driver of overall health care inflation.[1] The growth of prescription drug expenditures was significantly faster than the growth in hospital care and physician expenditures, which increased by 62.3% and 81.4%, respectively, between 1990 and 2000.

The principal drivers of prescription drug expenditures are increased utilization and increased cost per prescription. Per capita prescription drug use has increased 40% during the past decade, rising from 7.8 prescriptions per capita in 1993 to 10.9 prescriptions per capita in 2001.[2] This increase in prescription drug use can be attributed to the aging population, increasing third-party coverage of prescription drugs (driven by the increase in managed care penetration into the health care industry), and direct-to-consumer advertising. Individual prescription cost rose by 108% from 1990 to 2000 (from $22.06 per prescription to $45.79 per prescription). This increase is driven somewhat by increases in the price of existing products but to a greater extent by the increasing use of newer, more expensive, brand-name drugs instead of older, less costly, generic drugs.

While hospital expenditures continue to be the single largest component of health care costs, continued decreases in length of hospital stay and increases in the use of outpatient services slowed the rate of growth in the 1990s.[1,3] After an average annual decrease of 3.2% in inpatient expenditures between 1994 and 1998, these costs are now rising. A recent study revealed that inpatient spending has increased at a rapid pace over the past two years -- increasing 2.5% from 1999 to 2000 and 7.1% from 2000 to 2001 -- because of a decrease in managed care's control of utilization, hospital price inflation, and shortages of health care providers.[4] In addition, hospital inpatient expenditures increased by 6.2% through June 2002. Pharmacy departments (including labor and drug costs) are now the third largest component of hospital costs (trailing only imaging and surgical services), accounting for approximately 5.2% of direct hospital expenses.[5]

Overall, national pharmaceutical expenditures increased 19% from $146 billion in 2000 to $175 billion in 2001, 23% more than the Centers for Medicare & Medicaid Services (CMS) projection of $142 billion for 2001.[6,7] Further, there was a 5% increase in the number of retail and mail-service prescriptions filled between 2000 and 2001.[8] While the increase in expenditures in 2001 was greater than the 14.9% increase seen in 2000, the number of prescriptions filled did not change between 2000 and 2001. Pharmaceutical expenditures were projected to increase 14.5-15.5% to approximately $200 billion in 2002.[9] As discussed herein in greater detail, the approval of generic versions of several high-volume medications is likely to slow the rate of increase in drug-related spending, but the rate of prescription drug cost growth is not likely to change.

In our forecast for 2002 drug expenditures, we predicted a drug inflation rate of 15.5% for hospitals and clinics and 18.5% for outpatient and ambulatory care settings.[10] During the first eight months of 2002, the drug inflation rate for hospitals and clinics was 11.8%. Our 2002 prediction was based on the expectation of continued increases in the use of clinic-related drugs and a significant increase in expenditures resulting from the approval of drotrecogin alfa (Xigris, Eli Lilly). Drug purchases for clinics have risen only 17% over eight months compared with the 27% growth recorded in 2001, and drotrecogin alfa use so far has been less than anticipated (see below for additional discussion).[7] The growth rate of outpatient drug use was also significantly lower in 2002 than in 2001. After years of annual growth rates exceeding 15%, outpatient expenditures increased only by 12% through August 2002. This decrease in the growth rate of prescription drug expenditures may be attributed to the patent expirations of Prozac (fluoxetine, Eli Lilly), Glucophage (metformin hydrochloride, Bristol-Myers Squibb), and Zestril and Prinivil (lisinopril, AstraZeneca and Merck, respectively) and increasing implementation of multitier drug copayment systems.[9]

This article projects drug expenditures for calendar year 2003. It discusses factors related to drug utilization and drug costs. We hope that this information will aid health care professionals in determining how future changes will affect drug-related costs in their practice. Some data in this article may not be up-to-date because of events that have occurred after September 2002 when the article content was finalized for publication.