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V. Drug Prices

Drug prices have not been major contributors to rising medical prices. The drug component of the Consumer Price Index increased 13.3 percent over the period 1950 to 1965, or somewhat less than 1 percent per year on the average. There was no appreciable change in the drug component of the CPI during the 6-year period ending December 1966. The prices of prescription drug items in the CPI (as contrasted with over-the-counter drug items) actually declined by 11.7 percent between 1960 and 1966.

Industry sources give a slightly different picture. The average retail price per. prescription, reported in The American Druggist, increased at an annual rate of about 2.3 percent between 1955 and 1965, and at slightly less than 1 percent per year between 1960 and 1965.

The "average prescription price" reflects the use of new drug products, and changes in the quantities and prices of drugs prescribed. In contrast, the CPI reflects changes in the unit price of the same or similar drug items over periods of time. It is difficult to adjust the drug component of the CPI for the rapid changes in the character of the drugs prescribed. By the time a prescription item is incorporated into the index, its price may have fallen to a lower level than in previous years. In the interim, newer drugs are being prescribed at a higher price level, and the drugs included in the CPI may not reflect such price movements. Most of the difference between the increase in the "average prescription price" and the change in the drug component of the CPI can be attributed to the use of new and improved drug products and changes in the quantities prescribed. Consumer Expenditures on Drugs

Drug expenditures account for a substantial proportion of total consumer expenditures for medical care. However, the rapid increase in hospital charges and physicians' fees has led to a decline in the proportion of the consumer's medical care dollar spent on drugs. Drug expenditures accounted for about 20 percent of consumer medical care expenditures in 1950 and 16.4 percent in 1964.

Despite the fact that drug prices have not risen as rapidly as the CPI, the percentage of disposable income spent on drugs increased

from 0.8 percent in 1950 to 1 percent in 1964. Therefore, there was a significant increase in the use of drugs by the average consumer.

In recent years, there has been a marked increase in the use of prescription drugs as opposed to over-the-counter drug items. In 1959, the average American family purchased 11 drug prescriptions and spent $33 on prescription drugs. By 1965, the number of prescriptions per family had risen to 14, and average family expenditures on prescription drugs were $46.

There are at least five reasons why there has been a sharp increase in consumer expenditures for drugs during the postwar period:

1. Drugs, which have declined in price relative to the prices of other forms of medical care, have been substituted for more expensive forms of medical care.

2. Families spend more on drugs as their income increases. In the year ending June 30, 1965, for example, the per capita expenditure for prescribed drugs in families with incomes over $10,000 was 22 percent greater than the comparable outlay for individuals where the family income fell between $4,000 and $7,000.

3. The efficacy of drugs has improved significantly in recent years.
Modern advances in drug therapy have contributed to the
control of such diseases as tuberculosis and syphilis.

4. There has been an increase in consumers' desires for certain
kinds of drugs. For instance, from 1952 to 1963, the retail sales
of sedatives and tranquilizers increased 535 percent.
5. The increase in the proportion of elderly persons in the popu-
lation has resulted in an increase in the demand for drugs.
Average expenditures on all drug items by persons age 65 and
over are 221⁄2 times as high as those for the entire population.

Reasons for Concern About the Cost of Drugs

The cost of drugs imposes a major financial burden upon many American families. A large proportion of total drug expenditures are incurred by persons who are high users of medical care. For example, in 1962, 10 percent of those persons over the age of 65 incurred 40 percent of the expenditures on drugs by all persons over the age of 65. But out-of-hospital drug costs are generally not covered by health insurance. In 1965, about 3 million persons were enrolled in plans providing drug insurance coverage. However, 80 percent of these individuals had only partial coverage. Another 53 million persons were enrolled in plans which generally provided partial drug coverage after their drug expenditures exceeded a sizable deductible provision. Although average drug prices are not rising appreciably, there is ample evidence that they are higher than they would be if there were

greater price competition in the industry, either at the manufacturing or at the retail level. The pharmaceutical industry is characterized by high concentration, high advertising costs, and intense nonprice competition.

Drug manufacturers attempt to differentiate their brand names from the generic name of the drug through intensive advertising campaigns. For the 22 major pharmaceutical companies, the Kefauver Committee found that the selling expenditures of drug manufacturers accounted for 25 percent of the total sales dollar. The drug industry spends about $3,000 per doctor per year in advertising to the medical profession. Since the rapid advances in drug therapy during recent years have made it impossible for any physician in private practice to read and evaluate all of the information on new drugs, doctors obtain a great deal of their information about the efficacy of drugs from the manufacturer. The "detail men" of pharmaceutical companies provide a major source of new information to physicians on the advantages or disadvantages of their drug products.

A physician frequently prescribes a costly brand-name product when an equivalent lower-cost drug could be made available to his patient under the generic name. The doctor may be unaware of the existence of the less expensive drug, or he may be more familiar with the effects and dosage of the brand-name product. He may also be uncertain about whether two drugs with the same generic name are actually equivalent in therapeutic value. Although there are a number of different sources and formularies which describe the merits of many drugs, there exists no official or authoritative compendium which a doctor can consult for information about the efficacy of a drug. Moreover, even if the doctor prescribes a drug by its generic name, the pharmacist has no incentive to give the consumer the least-cost generic drug. Brand-name prescribing raises the cost of drugs not only to patients but also to the taxpayer when drug costs are covered by public programs. There is considerable sentiment in Congress to require or encourage generic purchasing or prescribing of drugs under all Federally financed programs. Before such legislation becomes feasible, however, doubts about the therapeutic equivalence of drugs with the same generic name must be erased. A major study should be undertaken of the most frequently prescribed drugs to determine the efficacy of brand-name products and their supposed generic equivalents.

APPENDIX

Medical Care Price Components of the CPI, Annual Averages, 1946-66

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Source: U.S. Department of Labor, Bureau of Labor Statistics.

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83-481

PART 2-NEW YORK, N.Y.

OCTOBER 19, 1967

Printed for the use of the Special Committee on Aging

U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON: 1968

For sale by the Superintendent of Documents, U.S. Government Printing Office
Washington, D.C. 20402 Price 70 cents

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