Economic Analysis of Price Determinants in Pharmaceutical Industry in United States

Vikas Singh, University of Arkansas for Medical Sciences

Abstract

Executive Summary: In recent years increase in spending for prescription drugs in US has outpaced spending in every other category of health expenditures. Expenditure on the prescription drugs in recent years has grown more rapidly then any other component of health care. National prescription drug spending rose by about 4 ½ (inflation adjusted rate of 14.5% since 1997) times from $40.3 billion in 1990 to $179.2 billion in 2003. Prescription drug expenditure growth galloping by about 17% per year is the fastest growing item in health care inflation. It accounted for 11% of total healthcare spending (which was only 5.8% a decade earlier), resulting in third highest category of healthcare expenditures after hospital care and physician services. Older Americans have to pay more and more on drugs, either at the pharmacy, in higher premiums or in cutback in benefits. All these factors have made US pharmaceutical industry a focus of considerable public attention and controversy. Increase in this spending can be attributed to several factors like: • Increased utilization • Shifts in the type and mix of drugs used • Price inflation • Innovation or R&D • Third party financing and public resistance to restrictions on coverage • Advertisement and promotion This paper analyzes the causes for increase in prescription drug expenditures, its economic evaluation and policy recommendations for the perceived inequity and inefficiency.