Spending on pills moderates, easing healthcare costs

The rate of spending on prescription drugs - a major contributor to the nation's spiraling healthcare costs - is slowing significantly, and that's potentially good news for businesses, states, and individuals struggling with the high cost of health insurance.

According to the most recent data from the Centers for Medicare and Medicaid Services, spending on prescription drugs in 2003 increased 10.7 percent - down from 14.9 percent in 2002. Other independent analysts say that the decelerating trend continues today.

A variety of factors are contributing to the decline. They include the insurance companies and corporations that now use pharmacy benefit managers (PBMs) to negotiate steep discounts with drug companies and drugstores; the states that are implementing new legislation to rein in their Medicaid and pension costs; and consumers themselves, who are opting more often for less expensive generics.

"It's very significant: It shows a paradigm shift in healthcare spending," says Mark Merritt, president of the Pharmaceutical Care Management Association, which represents the nation's PBMs. "Now, neither the drugstores nor the drug companies can simply charge what they want as they did in the old days."

Twenty years ago, PBMs didn't exist. Now, they represent corporations, unions, and health insurers that are responsible for as much as 75 percent of prescription-drug purchases. By representing multiple buyers, the PBMs are able to win discounts of between 20 and 40 percent, according to Jeff Trewhitt of the Pharmaceutical Research and Manufacturers of America. PBMs have also partnered with drugstores and basically told them that if they want business from customers of the PBMs, they have to give a discount.

Among other factors: In the past two years, several major drugs, like the indigestion drug Prilosec, have lost their patent protection, allowing for generic competitors. At the same time, fewer so-called groundbreaking drugs have now come onto the market.

Moreover, safety concerns arose with the expensive and widely promoted pain relievers known as the COX-2 inhibitors, such as Bextra and Vioxx. Several of them were pulled off the market. That prompted millions of consumers to go back to using less expensive alternatives that many physicians had long contended were just as effective.

And then there are actions by state governments. Currently, state legislatures are considering almost 600 bills nationwide that try to bring down the cost of prescription drugs as well as increase access to them for the uninsured. That's 47 percent more legislation than last year.

"It's a big issue for them," says Gary Claxton, a vice president of the Kaiser Family Foundation and director of its Health Care Marketplace Project. "They buy a lot of drugs through Medicaid and their state employee and pension programs. So if they can find ways to combine with other states to buy for Medicaid, say, or create formularies [lists of approved, less expensive drugs], they can get much better discounts."

But even with the good news about curbed spending on prescription drugs, many experts note that they make up just over 10 percent of healthcare spending in the country. So the overall problem of increasing healthcare costs continues to be a major problem not just for the states, but for the economy as a whole.

"Many policymakers still see the trend [in healthcare spending] as ominous," says Richard Cauchi, health program director at the National Conference of State Legislatures in Denver. "If the overall costs continue to go up, healthcare becomes less affordable, and more people will have less access to it. At the same time, prescription drugs seemed to be the No. 1 culprit in this several years ago, and now they are less so at this point, which is good."