Costs of Drug Therapy

The United States spends a larger share of its gross domestic product (GDP) on health than any other major industrialized country. In 1998, U.S. expenditures on health amounted to 13.0% of the GDP. To put this in perspective, the countries with the next highest shares of GDP spent on health were Switzerland and Germany (10.4 to 10.6% each) and Canada and France (9.5

to 9.6%). The rate of increase in the medical care component of the consumer price index (CPI) increased to 4.1% in 2000 from 3.3% per year during 1995 to 1999. The CPI for hospital and related services showed the greatest price increase in 2000 (5.9%), compared with other components of medical care.

In 1999, prescription drug expenditures totaled $99.6 billion, 8.2% of the total health expenditure of $1211 billion. In the same year, prescription drug expenditures increased 17% higher than the average annual rate of increase of 12% between 1995 and 1998. From 1990 to 2000, the CPI for prescription drugs increased by 3 to 6%. Prescription drugs posted one of the highest rates of CPI increase in 1999, 5.7%, while it dropped to 4.4% in 2000.

In 1999, 43% of prescription drug expenditures were paid by private health insurance (up from 25% in 1990), 35% by out-of-pocket payments (down from 59% in 1990), and 17% by Medicaid.3

Are drug prices too high? That turns out to be a topic of endless debate, because of the economics of the pharmaceutical industry — a subject that would fill a separate book. From our perspective, pharmaceutical pricing policy is a part of the environment of medications use and can receive only passing attention.

The pharmaceutical industry is, first of all, global. Second, it is based on very expensive research and development. Over the past decade, companies have gotten larger through mergers and acquisitions to increase the pile of capital available for expensive projects. Often, basic research was paid for by government grants (in the United States or elsewhere). Development cost, however, includes clinical testing and everything else necessary to bring a product to the market. As mentioned earlier, the industry claims that the average drug product costs $880 million and requires 15 years to bring-to-market. Meanwhile, patent protection, which started early in the drug's development, is running out.

It is a high-risk industry. Many products never make it to the market, despite millions of dollars invested. In contrast to development costs, production costs in the pharmaceutical industry tend to be rather low, even with exacting quality standards, expensive record keeping, and so forth. So the pharmaceutical industry prices it products to recover its investment plus profits commensurate with the risk. That means that it routinely charges dollars for products that cost pennies to produce. It also means that the industry prices according to supply and demand, i.e., what the traffic will bear. Because of federal drug regulations, it is difficult (to say the least) to import products purchased in other countries into the United States. This segments the market and allows the industry to sell a product in South America and Central America for a fraction of what it charges in the United States and Canada. The manufacturer can make money whenever it can sell a product for more than its marginal cost of production (the cost of producing the next tablet, so to speak). So, in effect, wealthier nations subsidize the poorer. Or, if you are so inclined, wealthier nations pay a fool's tax for drug products. Also, from time to time over the years, a relatively few, but highly publicized cases like chloramphenicol, Mer-29®, Pondimin®, and Redux® have shown examples that some manufacturers may put profit way ahead of public interest.4,5

This makes the industry vulnerable to criticism of astronomical overpricing and of profiting from the implicit subsidy by wealthy nations. The fact that people need medicines they cannot afford can easily lead to charges of profiting on people's misery. The industry's defense is threefold: new therapies are cost-effective and have revolutionized health care; the industry has a splendid track record of developing new, safe, and effective drugs; and finally, if it cannot remain profitable, it cannot attract capital. Without capital, research and development will dry up. These arguments have plenty of facts to support them, but this does not mean that prices in the United States are as low as they could be.

So, the debate goes on. On the one hand, we get a lot of value for 8% of health care expenditures. On the other hand, much of that $99.6 billion is spent out-of-pocket, so people feel the pain of expensive prescriptions. Medicare does not cover outpatient prescriptions, and many insurance programs force people to pay a significant share of prescription costs. Prescription drug expenditures are rising rapidly. This looks to many people like a budget that could be trimmed.

This is all background. From the perspective of medications use systems, the topic of interest is not to evaluate the industry's pricing structure, but rather to reflect on how patients and providers process information about prices and the relationship between cost, access, and quality, There are two fundamental frameworks for thinking about prescription drug costs: (a) as isolated components, as the discussion above has implied; and (b) as inputs to a health care system whose objective is to achieve therapeutic goals and improve the quality of people's lives.

The interplay is illustrated by the following fictional vignette (any similarity to real drug names is accidental):

Bill Dowers went to see Dr. Brown because of frequency and urgency of urination and pain when he urinated. Dr. Brown diagnosed Bill's problem as a urinary tract infection (UTI). The symptoms seemed rather severe, and this was Bill's third UTI within the past 24 months. Dr. Brown prescribed a long course of Megaflox. Although Megaflox was expensive, it had many advantages for a patient like Mr. Dowers. Dr. Brown told Bill to return in a week for a follow-up.

Bill Dowers stopped at the pharmacy on his way home to get the prescription filled. He felt lousy, and he was worried about needing to find a bathroom. In fact, that was his first question to the pharmacy clerk. The clerk took the prescription, but in a few minutes the pharmacist, Ms. Dee Spencer, asked Bill to return to the prescription department. She explained that Strongarm Health Plan, Bill's HMO, had a list of drug products that it would pay for, but that Megaflox was not on the list because it was too expensive. She could fill the prescription with Megaflox, but Bill would have to pay the $150 charge, or she could call Dr. Brown to get the prescription changed. Bill asked Ms. Spencer to discuss the problem with Strongarm. She replied that she had already tried, but the HMO would not authorize Megaflox unless Dr. Brown could justify requesting it for Bill. Bill then accepted the pharmacist's offer to call Dr. Brown.

When Ms. Spencer called, Dr. Brown had left for the day. The on-call physician approved a 5-day supply of SulfoMeth, a drug commonly used for UTI. Ms. Spencer left a message for Dr. Brown to call her back the next day and filled the SulfoMeth prescription. She cautioned Mr. Dowers to take the medicine until it was all gone and to drink lots of water.

Bill took the prescription, and in 3 days all of his symptoms were gone. He felt much better. The SulfoMeth bothered his stomach, and without his urinary symptoms to remind him, he forgot a few doses, and then a few more. The symptoms did not return, and he was free of the heartburn that he usually got after taking SulfoMeth.

Six months later, Bill Dowers returned to Dr. Brown with a backache. Dr. Brown diagnosed a kidney infection. He took a urine sample for culture and sensitivity, but he wanted to get Bill started on a potent antibiotic right away. He wanted to prescribe Megaflox, but his records showed that he had prescribed it for Bill 6 months earlier, so it might not have been effective. He was chagrined when he heard Bill's account of what had really happened at the pharmacy, and that Bill had not finished taking the SulfoMeth. It appeared to him that Bill had not taken his medical problem very seriously. He said that this time Bill might have to go into the hospital if the Megaflox did not work.

Table 5.1 shows two ways of expressing input costs and three ways of expressing effectiveness. The most elementary approach is generically called cost of illness. A cost-of-illness study would attempt to measure defined direct and indirect expenditures by people with a defined disease or syndrome. It could also be used to measure the cost of drug therapy per time period or per course of therapy for a disease. For example, a cost-of-illness study would tell us how much it costs per year to treat a patient with AIDS,


Five Types of Cost Study

Type of Study or Analysis

Example Question

Accounts for Outcomes

Cost of illness (cost of therapy) Cost minimization

Cost-benefit analysis

Cost effectiveness Cost utility

What does treatment cost? What is the distribution of expenditures?

Which treatment has the lowest drug cost?

Which treatment is most efficient?

What is the lowest cost per unit result or of result per dollar?

What is the lowest cost per unit of patient satisfaction (subjective utility)?

Ignores outcomes

Assumes outcomes of all treatments are equivalent Converts outcomes to "present"

dollars Retains "natural" units for outcomes, e.g., cure Outcomes converted to patient satisfaction or other value measures including how much the drug bill was. The approach has also been used to measure the cost of a drug-induced disease.

Eisenberg et al. measured the cost of nephrotoxicity (kidney damage) associated with the use of an aminoglycoside antibiotic.6 They reviewed the records of 1756 patients who received aminoglycosides and compared them to those of a sample of patients without nephrotoxicity. Of the 1756 patients, 129 (7.3%) developed nephrotoxicity. The mean total additional cost of this nephrotoxicity was $2501. The average additional cost per patient receiving aminoglycosides was $183.

Cost minimization is in a similar vein. It asks the question, "How can we carry out a defined process (e.g., provide drug therapy) as cheaply as possible?" Questions of cost minimization sometimes ignore differences in outcome, which is another way of saying that they may assume that all outcomes are equivalent.

This approach appeals to some hospitals and managed care organizations, especially when they are paid by a fixed formula instead of a markup. The implicit assumption of cost minimization applied to drug therapy seems to be that all of the alternatives have been approved by the Food and Drug Administration for the particular indication, and therefore the outcomes will be equivalent. Given that assumption, reducing the cost of one of the inputs, drug therapy, should reduce the total cost of care. But that assumption may sometimes be false. Cost analysis should, therefore, also include cost efficiency of care.

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