Monday, January 12, 2009

Who Pays for Prescription Drugs?

If you’re like me, you spent Sunday afternoon drinking beer, watching the Eagles trounce the Giants (whoo-hooo!), and poring over the latest U.S. National Health Expenditure data from CMS. (For the record, scrutinizing health expenditure data is a lot more fun when done in combination with football and beer, but that’s a subject for another post.)

Anyway, as widely reported last week, U.S. spending on outpatient prescription drugs grew by only 4.9 percent in 2007, which was below overall health care spending growth of 6.1 percent.

Here are three links for your reading pleasure, listed in increasing order of policy wonkiness:

CMS economists attribute the 2007 slowdown to three major factors:

  1. A generic dispensing rate of 67 percent in 2007, up from 63 percent in 2006 and 60 percent in 2005.
  2. Safety issues – The FDA issued 68 “black box” warnings in 2007 compared to 58 in 2006 and 21 in 2003.
  3. Part D spending, which declined following the one-time growth effect of adding the benefit in 2006

I was especially interested to see that public funds paid for 36 percent of total retail drug spending in 2007. The majority of public funds were associated with major CMS programs: Medicare, Medicaid, and State Children’s Health Insurance Program (SCHIP).

During halftime (with Eagles 10, Giants 8), I created the following chart to show how payments for prescription drugs (share of dollars) has changed during my lifetime.

Pretty amazing, isn’t it? Payment for drugs by private health insurance peaked in 2001 at 50 percent. Since then, public funds have been crowding out both public and out-of-pocket payments. CMS has not updated their forecasts yet, but public funds will probably pay more for prescriptions than private insurance within ten years.

So, how much money do pharmacies make from each of these payers?

Stay tuned later this week – the answer will surprise you!


  1. Dr. Fein:

    I read your post today and found it interesting.

    Though it doesn't speak directly to the points you made, I thought you might find PhRMA's statement on the CMS report interesting.

    Please let me know if I can provide anything else,


    Graydon Forrer
    Director, Communications and Public Affairs
    Pharmaceutical Research and Manufacturers of America
    Washington, D.C.

  2. Dr. Fein,

    Can you imagine how much lower drug spending would be if the FDA stopped approving "me too" drugs and if doctors stopped writing for these drugs. Look at the drug Amrix for example. It is simply cyclobenzaprine in an extended form version. It uses a time release "technology" that isn't even unique to the drug. It is a time relese technology that is used in other drugs. Amrix compares itself to cyclobenzaprine 1o mg as having "less sedation". Interestingly enough, it fails to compare itself to generic cyclobenzaprine 5mg. Amrix has an average cost (to pharmacies) of $ 7.25 a pill (daily use) as compared to 0.05 cents a pill (3 pills a day use) for the generic cyclobenzaprine 5mg tabs. The PBM's also thriive on these overpriced drugs because they collect "rebates" from the manufacturer, which seldom gets passed to the carrier/union, who is footing the bill.

    If it wasn't for these "me too" drugs, drug spending would go down A LOT.

    Look for another cost driver coming soon in the form of Vicodin CR, a controlled release Vicodin. Do we really need this type of drug?

  3. Dear Anonymous

    You are mistaken. It is actually the presence of these ‘me too drugs’ that allow us to play the manufactures against each other and hold the line on prices for branded drugs.

    From H-2 blockers, CCB’s ACE inhibitors, lipid lowering agents to SSRI’s, without the ‘fast followers’ (read me toos) the prices would have been MUCH higher. Go back to Econ 101: substitutability drives prices down…

    Your friendly Payor,


  4. Dr. Fein,

    How did you calculate the % of out-of-pocket spend? According to CMS, I believe, this category captures cash paying customers as well as co-pays, etc. How can we get to the actual % being spent out-of-pocket by cash paying customers (i.e., uninsured)?

  5. You are correct. See my comments below Drug Forecasts: Oops!...They Missed It Again.

    CMS doesn't provide the breakout, so IMS is your best bet.