Public Release: 

Increased use of prescription drugs - especially new ones - outpaces price hikes as source of cost increase

University of Michigan Health System

HMOs and other managed care plans see sharper cost jumps than traditional insurance

ANN ARBOR, MI - A dramatic rise in the utilization of prescription drugs, especially newly introduced ones, is the biggest reason for double-digit increases in the overall cost of prescription drugs for American workers - not inflation in the price of established drugs, a new University of Michigan study confirms.

Managed care insurance plans designed to contain health care costs are actually seeing the biggest jumps in prescription drug costs, as much as 35 percent in two years, due to their members' rush on prescriptions for existing and new drugs. In the same period, traditional insurance plans saw a 17 percent rise in spending - almost all from the use of new drugs.

The study, published today in the July issue of the American Journal of Managed Care by researchers from the U-M Medical School, School of Public Health and College of Pharmacy, looked at data from a single large national employer that offers a variety of insurance plans and prescription coverage options to its employees. The data, collected between 1996 and 1998, represent the prescription costs for 44,228 hourly and 75,433 salaried employees nationwide.

Though the data are not representative of the country as a whole, the study offers a unique insight into the factors that contribute to overall prescription drug spending, the impact of new products versus existing ones, and, for the first time, the differences in spending among different insurance plan types. It also confirms other, earlier findings on the impact of the general increase in utilization, as compared with the increase in product prices.

"As our nation continues the debate over federal prescription drug benefits, price controls and the impact of drug costs on insurance premiums, we hope these data will help the general understanding of what's fueling drug cost increases," says lead author Michael Chernew, Ph.D, associate professor of health management and policy and of internal medicine. "And from what we can see, the increases for employed adults are coming more from the demand for prescription drugs than from simple price increases on existing drugs - although this trend makes the prices of newly introduced products that much more important."

"It's important to recognize that growth in spending on prescription drugs isn't necessarily undesirable, because pharmaceuticals may reduce spending on other health care service such as procedures, with a better result for patients," says Mark Fendrick, M.D., associate professor of internal medicine and of health management & policy. "But in order to understand that larger picture, we need to know how prescription drug spending growth breaks down, and how different forms of insurance are affected depending on their approach to prescription coverage."

Fendrick co-directs, and Chernew belongs to, CHOICES, the U-M Consortium for Health Outcomes, Innovation & Cost Effectiveness Studies. Also on the team were Dean Smith, Ph.D., professor of health management and policy at the School of Public Health, and Duane Kirking, Ph.D., professor and chair of social and administrative sciences in the College of Pharmacy.

The study was funded by the employer whose data were used, and not by the pharmaceutical or health insurance industries or their representatives.

The new study follows on the heels of other reports on prescription drug costs based on national market research, surveys or federal government statistics. The employer-supplied data used by the U-M team gives a snapshot of real expenditures for employed adults nationwide, covered under employer-paid insurance plans with a variety of policies, benefits and drug co-payments. The analysis looked at monthly spending per employee on new and existing drugs.

No matter the type of insurance, overall drug costs and spending per employee increased by a sizable percentage in the two years examined. The employer's traditional fee-for-service (FFS) plan experienced a 17.3 percent growth, while the three preferred provider organizations (a type of managed care plan commonly known as PPOs) saw a 30.7 percent rise and the eight health maintenance organizations (HMOs) faced a 34.8 percent jump.

The researchers broke down the overall percentage increases for each plan type by their components - namely, different classes of drugs. Core drugs were those that were prescribed to members of at least one plan in 1996 and 1998, while new drugs were those introduced to the market and used by members of at least one plan after 1996. Abandoned drugs were those used in 1996 but not used by any members in 1998.

In all, nearly 21 percentage points of the 35 percent increase in HMO drug spending were due to prescriptions for core products, while 15 percentage points were due to prescriptions for new products and there was a slight drop due to abandonment of some products.

By contrast, the 17.3 percent increase seen by the fee-for-service plan was due to a 17.4 percent rise due to prescriptions for new drugs, and a 2.1 increase in core drug spending offset by a 2.2 percent drop due to drug abandonment. PPO plans had a 19.9 percent increase in costs due to prescriptions for new drugs, coupled with a 12.3 percent increase in core drug costs, and a 1.5 drop in costs for abandoned drugs.

The major differences in spending increases for core drugs and new drugs led the researchers to examine the core drug patterns more closely. They found that changes in the actual price of core drugs only accounted for 3.5 to 4 percentage points of the rise across the board. Much more of the change in core drug costs was due to fluctuation in the quantity of prescriptions, including the number and the mix of existing products of different doses and prices. The overall quantity in the fee-for-service plan dropped, while HMOs saw a 16.8 percent rise in quantity.


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