Factors Driving Changes in Prescription Spending

The main factors driving changes in prescription drug
spending are: 1) utilization; 2) price changes; 3) changes in
the types of drugs used; and 4) profitability.

Utilization. From 1994 to 2005, the number of
prescriptions increased 71% (from 2.1
billion to 3.6 billion), compared to a US population
growth of just 9%. The percentage of the population with a
prescription drug expense in 2004 was 59% (for those
under age 65) and 92% (for those 65 and older).

Price. Retail prescription prices increased an average of 7.5% a year from 1994 to 2006 (from an average price of $28.67 to $68.26), almost triple the average annual inflation rate of 2.6%.
The average brand name prescription price was over 3 times the average generic price in 2006 ($111.02 vs. 32.23).

Changes in Types of Drugs Used. Prescription drug
spending is affected when new drugs enter the
market and when existing medications lose patent
protection. New drugs can increase overall drug
spending if they are used in place of older, less
expensive medications; if they supplement rather than
replace existing drugs treatments; or if they treat a
condition not previously treated with drug therapy

Profitability. From 1995 to 2002, pharmaceutical
manufacturers were the nation’s most profitable
industry. They ranked 3rd in 2003 and 2004, and they ranked 2nd in 2005, with profits (return on revenues) of 19.6% compared to 6.3% for all Fortune 500 firms.