Prescription Drug Costs Account for 15% of Total Health Care Spending

Despite the frequent claim by the industry that 10% of spending goes toward pharmaceuticals, a new report published online in Health Affairs suggests that prescription drugs may actually account for roughly 15% of all money spent on total health care across the country.

Due to limited pricing transparency between the intermediaries that bring a medicine from drug maker to patient, it is often difficult to estimate the total money spend on drugs in the United States. For the report, Peter Bach, MD, director of Memorial Sloan Kettering’s Center for Health Policy and Outcomes, and colleagues, estimated revenues attained at each step in the drug supply chain.

They estimated gross spending on drugs at invoice prices and revenue reported by drugmakers after adjusting for rebates to be $450 billion and $323 billion, respectively, in 2016. The research team then used these totals as a starting point for retained revenue by drug makers and estimated gross profits for each of the other players in the drug supply chain. 

The team measured their figures against the Centers for Medicare and Medicaid Services (CMS) estimate of $3.3 trillion in national health expenditures for 2016 and determined that drugs account for the roughly 15% of spending rather than 10%.

“Our intent is not to infer or draw conclusions on where there are outsize profits or how difficult it would be to reduce spending within the supply chain, nor do we opine on the consequences of reducing that spending,” Dr Bach and colleagues explained. “But a recent policy focus on the supply chain suggests that understanding those consequences will be important—particularly in light of recent calls by [FDA] Commissioner Scott Gottlieb for greater transparency in price negotiations involving PBMs [pharmacy benefit managers], distributors, drug stores, and payers; appeals by the pharmaceutical industry and government to limit the scope of the 340B program; and deliberations by CMS to begin instituting point-of-sale rebates to reduce the out-of-pocket burden on patients.”

The current thought by the Trump administration, as well as top executives at pharmaceutical companies, is that drug rebates play a key role in increased drug spending. However, this new study suggests that by reducing the role taken by PBMs and directly targeting the money they collect, might not make as much of an impact on drug spending as some might believe.—Julie Gould