Behind the Headlines on Prescription Drug Prices

In my files are a series of reports detailing the rapid rise in the cost of medical care for Americans, especially for seniors.

The good news is that the numbers in the reports aren’t terribly accurate. The bad news is that these reports are used to scare people, especially those in and near retirement, and to make them feel vulnerable. The ultimate goal is to use the reports to change public policy on health care. Most of the reports on medical care costs and inflation are issued by groups with political agendas. They tend to be issued to the news media instead of to professional publications that are peer-reviewed. Read the reports very carefully or not at all. Don’t use them to plan your retirement.

There’s no doubt that the cost of medical care is rising faster than general consumer prices. There’s also no doubt that one of the mistakes of many pre-retirees is to underestimate the amount they will spend on medical expenses. We’ll get into the reasons for that shortly. First, let’s look at some of the distortions in the published reports.

You undoubtedly have seen reports that prescription drug prices routinely rise two, three, or even four times the consumer price index. More recently, these studies claimed that drug price increases more than wiped out the savings from the new Medicare Prescription Drug Discount Card program and from other drug discount plans. These studies get a lot of coverage in the popular media.

We need to dig into the details before making decisions based on these studies.

The first suspect feature of the reports is that they restrict themselves to what the writers conclude are the most popular, name-brand prescription drugs.

By focusing on name-brand drugs, the studies exclude generic drugs. Many name-brand drugs have seen their patents expire the last few years, and many more are about to expire. Generic drugs are the fastest-growing segment of the prescription drug market. The price of a generic drug is a small fraction of a competing name-brand drug’s, especially before the name-brand’s patent expired. Lipitor, perhaps the highest-grossing prescription drug in the world, often is cited in the studies of price increases. That shouldn’t be a concern if you plan to retire in a few years. Lipitor will lose its patent protection, and generic versions will become available.

The studies also have been caught playing games with their numbers. Let’s look at Lipitor again. One of the studies used price changes for the lowest available doses of Lipitor – 10 and 20 milligrams. Prices of the highest doses of the drug were excluded from the study, and those prices hadn’t changed for four years.

The multi-year comparisons used in the studies also are suspect. Many of the top-selling drugs this year weren’t even available three or four years ago. Other, unknown drugs will be the top sellers in a year or two. Price comparisons of top-selling drugs over several years don’t compare apples with apples and do not represent the drugs most consumers were taking over that time.

The focus on only the prices of drugs excludes other important factors. The studies make no attempt to factor in the improved health and lifestyles that are derived from using many of the drugs. The studies also ignore higher costs that the drugs reduce, delay, or eliminate.

For example, Celebrex reduces pain and inflammation. It might not do that any better than aspirin and ibuprofen. But it apparently is easier on the stomach and can reduce the 16,000 deaths and 100,000 hospitalizations that are estimated to occur each year because of bleeding ulcers caused by other anti-inflammatory drugs. Another example: Lipitor reduces cholesterol, which presumably reduces heart attacks, bypasses, and stent implants.

The government’s numbers on overall pharmaceutical price inflation (not just the prices of a few select drugs) tell a different story than the reports. The increase was 4.2% annually from January 2000 to March 2004. That is more than overall inflation. But it is less than general medical services price increases (4.6%) and far less than the studies show in their selective examination.

Medical expenses probably will continue to rise faster than the CPI and take a larger share of your budget through time. That is partly because of the unhealthy lifestyles many Americans have. It also is partly because there are more treatments available for various conditions. More treatments are likely to be developed in the future.

In addition, employers are steadily reducing the amounts they will pay for retiree medical care. In a few years most retirees will be responsible for almost all their medical expenses not paid by Medicare or privately-purchased insurance.
Another major factor in medical expense inflation is the prime role of governments and insurers in paying medical bills. Prices tend to rise faster when payments are made by a third party instead of the actual consumer.

Expect medical expense inflation, but not at the levels reported in selective studies. Following these distorted studies could depress you or cause unnecessary stress. You also might over-estimate the cost of retirement medical expenses. The actual cost will depend on your health, lifestyle, your employer’s policies, where you live, and other factors. Also, keep in mind that medical expense inflation for the last few years was unusually high. It probably will return to a lower rate.