Factors that Influence Pharmaceutical Spending Growth

Growing use of payer rebates among drivers of US drug spending increase.

An analysis by IMS Health identified several trends and drivers of growth in US drug spending, which reportedly totaled $310 billion in 2015, an 8.4% increase from 2014.

This analysis took into account any rebates and discounts that payers are granted by drug companies to lower the cost of drugs compared with their invoiced prices, an account that other estimations did not consider.

IMS reported 3 key trends in increased drug spending:

  • Payer rebates from drug manufacturers have increased in importance.
  • Existing branded drugs with higher price tags only account for a portion of the increased drug spend.
  • Newly branded drugs are a significant driver of spending growth.

Increased Importance of Payer Rebates

Drug manufacturers have been increasing the list prices of drugs, prompting the negotiation of different rebates with different payers. These rebates are partly dependent on what payers are willing to pay for a specific drug, as well as their ability to negotiate with drug companies.

When the manufacturers set a higher list price, it allows them to negotiate prices that are closer to the maximum amount a payer is willing to spend on their product.

Through this strategy, certain laws make it illegal for payers to resell drugs for higher costs, allowing purchasers and drug companies to keep all rebate amounts confidential. This results in manufacturers offering larger rebates to certain drug purchasers without having to reduce the prices for all payers.

High Priced Drugs Account for Only a Part of Increased Drug Spend

Through the IMS analysis, the company estimated that the cost of these drugs after rebates only increased by about 2.8%. This accounts for $4 to $6 billion of the $24 billion in total spending growth.

The findings suggest that policies solely focused on year-over-year price increases for existing drugs might have a limited effect on the total drug spending growth.

In 2015, volume growth of existing drugs accounted for only a small increase in total spending, the first recording since 2007. This volume increase can be attributed to greater utilization of existing medications, accounting for $2.7 billion in additional spending. This is largely due to the increased use of drugs to treat autoimmune diseases, blood clots, cancer, and mental health issues.

However, analysts noted that the estimates do not include rebates, so the actual spending growth caused by utilization is most likely lower.

The volume rise could also be attributed to the expanded use of drugs that are already FDA-approved. In 2014 and 2015 alone, the FDA approved 19 new indications for existing cancer drugs, which was more than in the prior 4 years combined.

New Branded Drugs are Drivers of Spending Growth

In 2015, there were 73 new branded drugs introduced to the marketplace, and the spending of the new brands increased by $24 billion, not accounting for rebates. According to IMS Health, they predict that the expenditures on new medications will increase by $91 billion from 2016 to 2020.

IMS reported that specialty drugs account for 36% of total drug spending and 75% of spending on new brands. These new drugs can offer significant health benefits to patients, but many of these products have a high price tag.

Drug costs have been a rising concern among the public and policymakers, especially regarding whether or not a patient can afford them and if the prices are reflective of the outcomes.

Authors stress that policymakers should focus on ensuring that new medications are both affordable and used appropriately, and that the spending is reflective of the outcomes.