Prescription drug spending in U.S. among highest worldwide

Prescription drug spending in the United States exceeds spending in nine other high income countries, with generic drugs comprising 84 percent of the total pharmaceutical market. Besides the U.S., a Commonwealth Fund issue brief looked at prescription drug spending in Australia, Canada, France, Germany, the Netherlands, Norway, Sweden, Switzerland and the United Kingdom.

Prescription drug spending in U.S. increases in 1990s

According to the Commonwealth Fund review, spending on prescriptions drugs increased substantially in the mid-1990s due largely to the growth of the pharmaceutical industry. For instance, FDA approved drugs were at an all-time high and sales of cancer drugs increased. Additionally, drug spending increased due to the expansion of federal programs such as the Children’s Health Insurance Program, Medicaid, and Medicare.

Prescription drug spending increased by 20 percent over a period of two years during the mid-2000s. The growth was primarily due to introducing many expensive specialty drugs to treat hepatitis C, cystic fibrosis and other conditions. Passage of the Affordable Care Act likely led to such increases as well. U.S. spending on pharmaceuticals surpassed $1,000 per person in 2015 and was 30 percent to 190 percent higher than in the nine other countries. The next countries, behind the U.S., in spending in 2015 were Switzerland with $783, Germany with $686, and Canada with $669.

Reasons U.S. spending on prescription drugs is so high

The Commonwealth Fund offered possible reasons to explain why the U.S. spends so much on prescription drugs, including country population and volume of drugs consumed, drug utilization per person, type and mix of drugs consumed (e.g., generics versus brand-name drugs), and prices at which drugs are sold.

Although the U.S. population is ranked among the largest and has the highest prescription drug spending as a country, spending per capita remains much higher in the U.S. than that of other countries. Higher per person spending is not due to the large population of the U.S., however.

The impact of generic prescription drugs

Generic drugs make up 84 percent of the total U.S. pharmaceutical market, which is a larger share than in all other countries, excluding the U.K., which is tied with the U.S. with 84 percent. Followed by the U.S. are Germany with 81 percent, Netherlands with 71 percent and Canada with 70 percent of the share of generic prescription drugs. Lower prescription drug prices in the other countries reflect more centralized processes for obtaining pharmaceuticals and setting coverage.

Conclusion. Price continues to play a primary factor in the high prices associated with prescription drugs in the U.S. The reasons can be attributed to the fragmented nature of health care delivery and payment, as well as separate negotiation arrangements between drug manufacturers and payers and complicated arrangements for federal and state health programs. Also, the U.S., unlike other countries, allows for greater latitude for monopoly pricing of brand name drugs.

Fed big spender, as prescription drugs drive increases

U.S. health care spending in 2015 grew by 5.8 percent, reaching $3.2 trillion; on a per capita basis, spending on health care increased 5 percent to $9,990, according to researchers at the Office of the Actuary at CMS in a new National Health Expenditures report. As a result, the share of gross domestic product devoted to health care spending was 17.8 percent in 2015, up from 17.4 percent in 2014. CMS noted that although millions of people gained coverage in part to the Patient Protection and Affordable Care Act (ACA) (P.L. 111-148), per-enrollee spending growth in private health insurance and Medicare continued to be well below the average in the decade before passage of the ACA.

In 2015, the federal government accounted for the largest share of health care spending (29 percent), followed by households (28 percent), private businesses (20 percent), and state and local governments (17 percent). Hospital care accounted for the most spending based on type of service or product at 32 percent with physician and clinical services at 20 percent.

Retail prescription drug spending continued to grow faster than the overall spending growth, increasing 9 percent to $324.6 billion. Although the growth in 2015 was slower than the previous year, spending on prescription drugs still outpaced all other services in 2015.

Spending numbers 

Overall, private health insurance expenditures, which amounted to 33 percent of total health care spending, reached $1.1 trillion in 2015, and increased 7.2 percent in 2015. The faster rate of growth reflected increased enrollment in private health insurance associated with coverage expansions under the ACA, and a notable increase in the enrollment in employer-sponsored plans.

Medicare spending, which amounted to 20 percent of total health care spending, grew 4.5 percent to $646.2 billion in 2015, which was a slight deceleration from the 4.8 growth percent in 2014. The slightly slower growth in 2015 was largely attributable to slower growth in Medicare enrollment, which increased 2.7 percent to 54.3 million beneficiaries following 3.1 percent growth in 2014.

Medicaid spending, which accounts for 17 percent of total health care spending, slowed slightly in 2015 to 9.7 percent, but continued the growth that began in 2014 (11.6 percent). State and local Medicaid expenditures grew 4.9 percent while Federal Medicaid expenditures increased 12.6 percent in 2015. The latter increase was attributed to newly eligible enrollees under the ACA.

Out-of-pocket spending grew 2.6 percent in 2015 to $338.1 billion, slightly faster than the growth of 1.4 percent in 2014.

FDA, CMS facilitate continuity between approval of, payment for medical products

Fragmentation in the process of approving and clearing drugs for marketing by the FDA and then clearing drugs for coverage by CMS has led to questions regarding whether FDA approval necessarily results in approval for coverage and payment under Medicare and Medicaid. In a Journal of the American Medical Association (JAMA) perspective written by CMS Acting Administrator Andy Slavitt, FDA Commissioner Robert Califf, and FDA Deputy Commissioner for Medical Products and Tobacco Rachel Sherman, the authors posit that, despite such challenges, changes in the organization of health care and the larger technology landscape should allow the FDA and CMS to move toward the use of shared sources of evidence while still applying the most appropriate criteria to decision making.

In product approval and clearance for marketing by the FDA and in coverage and payment determinations by CMS, the agencies use scientific evidence to make determinations. The use of shared sources of evidence would help to reduce gaps in information that could lead to uncertainty in the approval or clearance of new therapies, as well as their subsequent use in medical treatment. Shared information would also increase efficiency in medical product development and ensure the use of high-quality evidence.

It is standard practice to use in the approval and clearance for marketing process research examining the effects of therapeutics in narrow, strictly delineated populations that may not reflect the clinical practice settings in which the products will be used. The authors stressed that when a product demonstrates promise in this narrow setting, developers should pivot quickly toward evaluating the product, using “evidence about the risks and benefits of tangible health outcomes in clinical settings and among patients representative of those who will actually use these products.” The expansion of the scope of research used in the approval and clearance process will help show how a product is likely to perform and how to utilize the product in treatment.  Garnering early involvement of health systems and payers will help the agencies to determine what kinds of evidence are needed to incorporate the product in practice, where the product fits in formularies and device inventories, and whether or how much to pay for its use.

The FDA and CMS are focusing on the following to ensure that adequate evidence is available to guide patients, clinicians, and payers in their choices:

  • clarifying the need for including diverse populations and measuring relevant clinical outcomes within the trials conducted for regulatory approval and to inform labeling;
  • collaborating with other federal agencies to build functional links across a range of systems to make the best use of existing digital information captured in the course of health care delivery, such as electronic health records, insurance claims, and data within clinical registries; and
  • ensuring broad collaboration across public and private sectors.

Average drug spending dropped for consumers with employer-sponsored coverage

Although average annual drug spending for those with employer-provided health coverage dropped $23 between 2009 and 2014, more people are spending over $1,000 a year on prescription drugs. The Kaiser Family Foundation (KFF) believes that the drop in spending first occurred to due generic substitution and then from the Patient Protection and Affordable Care Act’s (ACA) (P.L. 111-148) contraceptive mandate (section 2713).
Employer-based plans. Recent surveys have shown that a growing amount of those taking prescription drugs find it difficult to afford their medication. The KFF also noted that government and insurer studies blame specialty drugs and price increases for name brand drugs as the reason for the more rapid drug spending growth in recent years. A comparison revealed that drug spending trends in employer coverage generally match national patterns, such as a large spending spike in 2014.


Average drug spending in employer plans stayed within a small range when adjusted for inflation for almost a decade, at $909 in 2004 to $947 in 2013. In 2014, it grew by 13 percent to $1,053. At the same time, the share of people with drug spending exceeding $5,000 (both out of pocket and paid by insurance) grew from 1.6 percent in 2004 to 3.9 percent in 2014. Those with diagnosed endocrine disorders, circulatory diseases, cancers, and blood diseases are more likely to have high drug spending. The share of those with employer coverage that spent over $1,000 per year on retail prescription drugs nearly tripled. Although this group represents only 3 percent of all people with large employer coverage, their spending accounts for one-third of aggregate out of pocket spending.

Despite this growth, those with large employer coverage spent less on average in 2014 ($144) than they did in 2009 ($167, or $185 in 2014 dollars). During this time, some popular drugs lost patent protection and patients began taking the generic option. In addition, the contraception mandate may have been responsible for causing women to see the sharpest drop in out-of-pocket spending. Oral contraceptives make up 63 percent of drop in average out-of-pocket spending on retail drugs after 2012.