Prescription Drug Expenditures in the United States: The Effects of Obesity, Demographics, and New Pharmaceutical Products

Abstract

[Author Affiliation]Donald Vandegrift, Professor of Economics, The College of New Jersey, 2000 Pennington Rd., Ewing, NJ 08628, USA; vandedon@tcnj.eduAnusua Datta, Associate Professor of Economics, School of Business Administration, Philadelphia University, School House Lane and Henry Avenue, Philadelphia, PA 19144, USA; dattaa@philau.edu; corresponding author[Acknowledgment]We wish to thank Subarna Samanta, Judith Shinogle, and Karen Conway for helpful discussions and comments. Julie L. Hotchkiss provided us with valuable suggestions for an earlier version of this article, and we benefited from advice given by two anonymous referees at this journal. Ellie Fogarty, Ravi Kaneriya, Michael Ferlise, and Leigh Ann Culbertson provided valuable research assistance.1. IntroductionDuring the period 1990-1998, real per capita expenditures on prescription drugs in the U.S. increased by 84% (1996 dollars, GDP deflator). Beginning in 1993, the average annual percentage increase in prescription drug spending exceeded the overall percentage increase in national health expenditures. By 1998, the annual percentage growth in prescription drug spending was more than 16%, while overall spending on health care rose less than 6% (compared to the previous year). In total, U.S. consumers spent more than $90 billion on prescription drugs in 1998, or $334 on a per capita basis (Centers for Medicare and Medicaid Services 2002). Not surprisingly, prescription drug coverage and its associated costs have become issues in national as well as state political campaigns.1But the rising expenditures were not simply caused by higher prescription drug prices. While the CPI (Consumer Price Index) for prescription drugs rose by 42%, nominal per capita expenditures on prescription drugs rose 120% during the period (U.S. Bureau of the Census 2002). Consequently, higher rates of prescription drug consumption explain at least part of the story. Further, while overall prescription drug spending has increased rapidly, per capita prescription drug use in the United States varies widely by state. In 1998, some states had per capita prescription drug spending of more than $400, while other states' residents spent half that much.While we do not wish to absolve the pharmaceutical manufacturers, this data suggests that arguments placing the blame for high prescription drug costs on the prices and profits of pharmaceutical manufacturers may be missing a portion of the story. The literature on prescription drugs suggests a number of causes (e.g., new drug introductions, aging of the population, insurance coverage). However, Berndt (2002) notes that a shortcoming of the existing literature is the lack of quantitative estimates of the causes for increased consumption of prescription drugs since the mid-1990s. In a similar vein, Kane (1997) concludes that the effect of the managed care revolution has been difficult to separate out from the other forces affecting pharmaceuticals.To better inform public policy, we provide some quantitative estimates of the factors that have contributed to the increase in prescription drug expenditures. We investigate the role of public health factors (obesity, smoking, and alcohol consumption rates); aging (population 65 and over); access to medical care (managed care enrollments and the relative size of the uninsured population); new pharmaceutical products; income; and unemployment on real prescription drug expenditures, using panel data from all 50 U.S. states for the period 1990-1998. The estimates should allow better projections of the anticipated increase in prescription drug expenditures.Gauging the costs of smoking, obesity, and alcohol consumption is also important. High costs associated with any of these public health problems make it easier to justify costly government programs to reduce their prevalence. Thus, public policy responses to rising prescription drug expenditures will vary based on the source of the increase. …