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The Sheep in Wolf’s Clothing: Is Drug Spending Really Crippling the U.S. Health Care System?

Before the catastrophe of the housing and banking crises became fully apparent, affordable health care topped the list of financial concerns for most Americans. Now that the dust from these crises has begun to settle, health care has returned to center stage. The cost of providing coverage looms large as health care spending growth is exceeding sluggish gross domestic product growth. With this in mind, I believe it is an opportune time for stakeholders to examine the factors contributing to growth in the cost of health care.[IMGCAP(1)]A usual first suspect is prescription drug spending. There is a perception that the costs of prescription drugs and biologics are increasing rapidly. However, the perception of rapidly increasing biopharmaceutical expenditures is dated and now simply wrong. The rate of drug spending has actually slowed to levels not seen in decades. Double-digit rates of growth did in fact occur in the decade up to about 2005. But since then, biopharmaceutical spending growth has fallen sharply, -3.8 percent in 2007 (when adjusted for inflation, just 1.6 percent) and in 2008, when adjusted for inflation, actually negative growth at -0.8 percent. This contrasts with the hospital and long-term care sectors, where annual expenditure growth has consistently been greater than 7 percent.In a December 2008 Health Affairs article I jointly authored with David Cutler from Harvard University and Murray Aitken from IMS Health, we pointed out several reasons for why a turning point has been reached for biopharmaceutical expenditure growth. A substantial number of blockbuster drugs have gone off patent and are being replaced with inexpensive generics. Health plans and pharmacy benefit managers have been very successful in their efforts to encourage generic substitution. In 2008, 69 percent of medications were prescribed in generic form as were almost 90 percent of all generic eligible prescriptions.We can expect the very low if not negative growth to continue in the future, as branded drugs with combined sales of almost $100 billion lose patent protection in the next four years. Furthermore, the number of multibillion-dollar “blockbuster— drugs has declined, in part because the growth of new introductions has slowed. Interestingly, generics aside, spending on the more expensive specialty medicines has also slowed considerably.Looking ahead several years, I expect that growth rates might not be as high as many lawmakers and policy analysts anticipate. Official government national health expenditure projections show a 23 percent increase in drug spending between 2008 and 2012. But IMS Health, a health data provider, forecasts a 6 percent decrease in retail pharmaceutical growth in the same period, taking into detailed account the effects of the recession and the loss of patent protection on blockbuster drugs. This equates to over $150 billion less pharmaceutical spending than was anticipated. Furthermore, fewer new drugs will be introduced to the market over the next few years than in the past.On the one hand, all of these findings are welcome news for those wanting to rein in health care cost growth. However, there is an overlooked downside. Slower prescription drug growth means less revenue circulating back into research and development and fewer new medicines in the future. Medication is a relatively inexpensive technology relative to other health care interventions. Based on the evidence, focusing on drug expenditures as a means to tame overall health care spending neglects the real factors driving spending growth and runs the risk of choking off valuable investment dollars for tomorrow’s medicines.Ernst Berndt is the Louis E. Seley professor in applied economics at the Massachusetts Institute of Technology.

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