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Health Tracking

TRENDS

The Impact Of Pipeline Drugs On Drug Spending Growth

Pipeline drugs are entities that are undergoing testing but have not yet received approval from the U.S. Food and Drug Administration (FDA). In 1999, 643 drugs were undergoing Phase II/III or Phase III clinical trials in the United States or awaiting drug approval for treatment of human diseases and disorders.² Although drugs in Phase II/III testing have a reasonable probability of gaining FDA approval within the next two to five years, one should keep in mind that only one of every 3.5 drugs entering Phase II is ultimately approved by the FDA.³

As product shift occurs with increased prescribing of newer pharmaceutical agents to replace older drugs, the average price of prescriptions goes up, use of newer drugs increases, and drug spending rises. The average price per prescription may rise, as was the case with Cox-2 inhibitors (such as Celebrex and Vioxx) replacing generic versions of older nonsteroidal anti-inflammatory drugs (NSAIDs). These new therapies may have major benefits, such as reduced side effects or greater clinical effectiveness. However, they are often more expensive than the therapies they replace. In addition, the benefits of the newer therapies may lead to greater utilization. These newer products serve new markets and meet the demands of older markets. For example, when Lipitor, a cholesterol-lowering drug, was introduced in the late 1990s, its sales skyrocketed to more than 1.5 million prescriptions in the thirteen months following its introduction. People who were already being treated with other cholesterol-lowering drugs generated some of these sales, but many sales were to new patients.

Components Of Drug Spending Increases

 
Drug spending increases can be broken down into three components: price, utilization, and product shift. Each plays a pivotal role in determining the growth of future drug spending. By examining where those components have charted historically, one can predict the relative importance of each on future spending.

There are numerous studies that examine the relative contributions of changes in price and utilization; we chose three representative studies that provided valuable projections of future drug expenditures. In each of these studies, the research groups laid the groundwork to justify the principle that historical precedent can serve as an indicator for future spending. There was considerable variation in how the studies measured the relative impact of price and utilization increases. For example, Robert Dubois and colleagues analyzed seven diseases and their corresponding drug classes and found that the relative ratios of increased volume to increased price ranged from a low of 2.5:1 to more than 10:1. Based on these results, they argued that volume would be the major component of spending change for most of the diseases they examined.⁴

Contrasting results emerged from a 1999 study conducted by Barents Group for the National Institute for Health Care Management Research and Educational Foundation. This study found that higher drug prices accounted for 64 percent of the total increase in drug spending from 1993 to 1998; utilization accounted for 36 percent.⁵ These researchers also found that the relative contributions of price and utilization varied greatly across therapeutic categories.

The work of the pharmacy benefit management (PBM) company Express Scripts demonstrated that the use of "common" drugs ( defined as drugs other than those introduced since 1996) grew by 6.2 percent and accounted for 38.8 percent of their total 1998–1999 cost increase.⁶ The increases in the average wholesale price (AWP) ingredient costs per prescription for common drugs were responsible for half of the company’s overall prescription drug spending between 1998 and 1999. Express Scripts estimated that the rate of inflation accounted for almost one-third of the overall 17.4 percent increasing trend in per member per year AWP cost.

Overall, the available literature provides scarce quantitative projections of the potential impact of pipeline drugs on future spending. American Druggist’s top 100 (from 1995 to 1998) charts new drugs as consisting of close to half of the market share. As a category, "new drugs" may be thought of as those drugs that were referred to as pipeline drugs several years ago. The Barents Group and Express Scripts studies take this perspective. The study by Dubois and colleagues provides insight into high-profile new drugs. The studies’ results, however, are difficult to quantify in a uniform fashion given that (1) the timeline upon which a pipeline drug was defined varied, and (2) the scope of the pipeline drugs’ markets varied according to the definition of the drug/disease categories. Barents Group defined "new drugs" as those that were launched in 1992 or later.⁷ Express Scripts’ 1999 report estimated the impact of the introduction of new drugs by looking at the drugs introduced after 1996.⁸ Since neither of these studies adequately addressed the impact of pipeline drugs on drug spending growth, our research fills a gap in the existing literature.

Our study has two objectives. The first is to disaggregate historical drug spending increases into three components: price increase, utilization increase, and product shift. The second objective is to demonstrate the potential impact of pipeline drugs on annual drug spending increases, factoring in what has been observed historically for newer drugs.

Using projections from the Health Care Financing Administration (HCFA, now the Centers for Medicare and Medicaid Services, or CMS) as a reliable baseline measure, this paper presents upper and lower bounds of their estimates surrounding future drug spending based on plausible scenarios of the influence of pipeline drugs. While CMS estimates do not specifically address pipeline drugs, they do provide a growth range of national health spending that combined historical data and projections based upon those data. These estimates predict drug spending increases of 17.4 percent from 2000 to 2001, with the annual rate of increase declining to 12.1 percent in 2004.⁹ We examine how the insertion of pipeline drug trends can potentially adjust these trends. For example, if pipeline drugs show a stronger influence than assumed in the baseline model, then the CMS numbers would underestimate the probable future trend in drug spending. Conversely, if the impact of pipeline drugs becomes weaker and there is increased use of generic drugs, then the CMS estimates may overstate future trends. The CMS’s numbers reflect historical data as predictors of future growth and therefore are subject to uncertainty. Furthermore, there are higher and lower estimates from other studies that fall above and below the CMS scale. Such variation arises because of differences in the market basket of drugs that are examined, the data sources, and the underlying assumptions surrounding the projections.

Historical Contributions Of Price, Product, And Utilization

Top Components Of Drug Spending... Historical Contributions Of... Implications For Future Spending... Discussion And Policy... NOTES

 
Our study examined those drugs reported by American Druggist as being in the top 100, based on prescription volume, in 1995–1998.¹⁰ The underlying assumption is that these drugs can be used to describe the pharmaceutical marketplace. They represent approximately 40 percent of drugs dispensed in community pharmacies, based on prescription volume. Since the top 100 drugs changed from year to year, a total of 131 drugs were included in the top 100 list over the four-year period. These data were matched with drug price information from an AWP database. Although the AWP does not reflect the actual price paid by retailers and consumers, it may serve as a reasonable proxy for calculating the percentage change in spending as long as the relative variance from price is constant over the study period. However, there are scarce data documenting the typical rebate and markup percentages, so it is difficult to determine whether they changed in the late 1990s.

The price associated with the most common dosage form, strength, and package size was used for each drug. If two or more generically equivalent versions of the same drugs on the top 100 list were produced by different manufacturers, all were included in our analysis. Price information was available for 129 of the 131 drugs. The other two drugs were thus excluded. We multiplied the number of prescriptions by the corresponding prices to produce a proxy for drug spending.

These data were used to estimate the historical components of drug spending increases, which include the pure price inflation effect, the utilization effect, and a product shift effect. The drug price increase was estimated based on those drugs that remained on the top 100 list for two consecutive years. The utilization increase is based on the utilization growth rate of all drugs. Removing the contributions of these two factors, one can obtain the value of the third component: increases in the average cost per prescription as a result of switching from older drugs to newer drugs. ¹¹

American Druggist reports complete data on the total number of prescriptions for all drugs, so we could calculate the utilization increase based on all drugs, not just the sample of those drugs in the top 100 in a given year. ¹² Thus, our estimate of utilization increases is the percentage increase in the total number of prescriptions from one year to the next. Calculations for projected expenditures and price inflation were more complex because we had to model our estimates based on the top 100 sample. To acquire accurate estimates, we used two distinct methods. The first involved a fixed basket of drugs and measured the utilization weighted mean of annual percentage increases in the prices and expenditures for the top 100 sample. The numbers of prescriptions were used as weights. This method focused exclusively on those drugs that remained in the top 100 list for two consecutive years. Because this method uses a fixed basket of drugs, it is fine for calculating pure price inflation but may be problematic for calculating spending increases. ¹³ Therefore, we used an alternative method, one that reflects the change in spending from an "old basket" of drugs to a "new basket." This second method consisted of calculating the annual percentage increase in total spending for all drugs on the top 100 list from one year to the next, allowing the "basket" to change. Thus, the spending increase includes all three components: pure price inflation, increase in utilization, and product shift.

Based on this methodology, slightly less that one-third of the drug spending increase between 1995 and 1998 was due to price gains on existing drugs, approximately one-third was due to increases in the use of existing drugs, and slightly more than one-third was due to product shift. Thus, while the three contributing factors have similar impacts, the increased use of newer drugs is the most important by a small margin.

We also estimated the relative contribution of newer drugs to the overall drug spending increase, to appraise the possible contribution of pipeline drugs. Based on our data, the historical spending increase was 15 percent for all drugs, 25 percent for newer drugs, and 7 percent for older drugs. Our findings indicate that although newer drugs, as a proxy for pipeline drugs, constituted 45 percent of the top 100 drugs during our study period, they contributed 75.3 percent of the overall drug spending increase. This contribution reflects not only the product shift from older to newer drugs, but also the corresponding increases in prices and use of these drugs. The remaining 25 percent is attributable to price and utilization increases of drugs that are more than five years old. Furthermore, the relative contribution of pipeline drugs appears to have increased over time.

Implications For Future Spending Trends

Top Components Of Drug Spending... Historical Contributions Of... Implications For Future Spending... Discussion And Policy... NOTES

 
To determine how the impact of pipeline drugs could influence future drug spending trends, we modeled several variations around the CMS projections, using our own research on the relative contributions of pipeline and other drugs. These projections are intended not to replace the CMS estimates but rather to provide a plausible range around those estimates. ¹⁴ For brevity, we provide only upper and lower-bound projections around the CMS estimates and acknowledge that the procedures to obtain the upper and lower bounds use different methods.¹⁵ We also have taken into consideration that the CMS did not address pipeline drugs.

To generate these estimates, we hypothesized that the relative contribution of pipeline drugs on overall spending increases from our own research, estimated at 75 percent, could be applied to the CMS’s annual spending estimates. We then explored several alternative scenarios, holding constant the portion of the CMS estimates attributable to nonpipeline drugs, while allowing the pipeline component to change. In estimating the lower bound we considered changes in the number of new drug approvals and the relative contributions of pipeline and other drugs to overall spending based on our research. The compounded annual growth rate of new drug approvals decreased 7.5 percent over 1996–2000. Assuming that this decline reduces the contribution of pipeline drugs to future spending by the same percentage, we calculated revised estimates of the annual change in drug spending. In the lower-bound scenario the pipeline drug component is decreased by 7.5 percent from the CMS estimate each year, while that of nonpipeline drugs remains consistent with the baseline case (Exhibit 1). ¹⁶

Based on the CMS model, drug spending is projected to increase from $116.93 billion to $196.91 billion between 2000 and 2004 ( Exhibit 2). According to our lower-bound analysis, it is projected to reach $191.56 billion in 2004. Our upper-bound scenario projects national drug spending of $215.62 billion in 2004. Thus, there is approximately a 12 percent variance for the 2004 estimate using our upper-and lower-bound estimates.

View larger version (12K): [in this window] [in a new window] EXHIBIT 2 Drug Spending Trends Based On CMS Projections, Upper-Bound And Lower-Bound Analyses, Billions Of Dollars, 2000–2004

Discussion And Policy Implications

Top Components Of Drug Spending... Historical Contributions Of... Implications For Future Spending... Discussion And Policy... NOTES

 
We began this paper by citing the work of other researchers, who have produced widely divergent estimates of future drug spending increases. The CMS projections for 2000–2004 have changed as new data have become available. In its 2000 projection, the CMS had data only through 1997, and the agency’s projection for 2000–2004 was in the range of 10.2–11.4 percent. However, when data through 1999 were included, the projection for the same period rose to 12.1–17.4 percent. ¹⁷

Our assumption that the future impact of pipeline drugs can be predicted based on the relative impact of recently released drugs may seem to be a heroic one. Indeed, it is subject to variability in the same way that predicting future drug trends based on historical spending patterns is speculative. The uncertainty surrounding the impact of pipeline drugs on future spending underscores the reason why drug spending trends are so sensitive to the underlying assumptions of the predictive model.

Based on the analysis presented in this paper, the impact of pipeline drugs on total expenditures could alter the CMS’s projected drug spending growth rate by around one to three percentage points. Although seemingly small on a percentage basis, these alternative estimates translate into a $24 billion difference between our lower-and upper-bound estimates for 2004. Therefore, consideration of pipeline drugs is imperative for understanding and projecting future drug trends.

With so many drugs in the pipeline, there will undoubtedly be innovative drugs that will assist patients who went untreated before. How our society will pay for these new treatments is one of the most important health policy questions we face. In an era of finite resources, the question is how to balance providing access to as many of these innovative, life-saving drugs as possible without increasing premiums beyond health care purchasers’ ability to pay. Rising demand for pharmaceuticals makes this balancing act a challenge. Future studies on the value of pipeline drugs will aid enormously in this decision-making process.

Editor's Notes

 
C. Daniel Mullins is an associate professor and associate director of the Center on Drugs and Public Policy, University of Maryland School of Pharmacy, in Baltimore. Junling Wang is a graduate student in pharmaceutical health services research there. Francis Palumbo is professor and director of the center. Bruce Stuart is professor and director of the Peter Lamy Center on Drug Therapy and Aging, University of Maryland School of Pharmacy.

Funding for this project was provided by the Health Insurance Association of America and the Blue Cross/Blue Shield Association.

NOTES

Top Components Of Drug Spending... Historical Contributions Of... Implications For Future Spending... Discussion And Policy... NOTES

 

1. Centers for Medicare and Medicaid Services, National Health Care Expenditures Projections Tables, March 2001, www.hcfa.gov/stats/NHE-Proj/proj2000/tables> (30 March 2001); and CMS, National Health Care Expenditures Projections Tables, January 2000, <www.hcfa.gov/stats/NHE-Proj/proj1998/tables> (30 March 2001).
2. "Products in the Pipeline," What’s in the Pipeline (A supplement to MedAdNews, July 1999): 17–148. In Phase II clinical trials, the study drug or treatment is given to a larger group of people (100–300) to see if it is effective and to further evaluate its safety. In Phase III studies, the study drug or treatment is given to large groups of people (1,000–3,000) to confirm its effectiveness, monitor side effects, compare it to commonly used treatments, and collect information that will allow the drug or treatment to be used safely. National Institutes of Health, <clinicaltrials.gov> (9 July 2001).
3. M. Montagne, "Drug Use and the Pharmaceutical Sector in the United States," in Introduction to Health Care Delivery: A Primer for Pharmacists, ed. R.L. McCarthy (Gaithersburg, Md.: Aspen, 1998).
4. R.W. Dubois et al., "Explaining Drug Spending Trends: Does Perception Match Reality?" Health Affairs (Mar/Apr 2000): 231–239.
5. Barents Group LLC, Factors Affecting the Growth of Prescription Drug Expenditures (Washington: NIHCM Foundation, 9 July 1999).
6. Express Scripts, 1999 Drug Trend Report, <www.express-scripts.com/newsviews/industryreports/drugtrendreport.htm (30 January >2001).
7. Barents Group, Factors Affecting the Growth.
8. Express Scripts, 1999 Drug Trend Report.
9. CMS, "National Health Expenditure Projections: 2000–2010," March 2001, Table 11, <www.hcfa.gov/stats/NHE-Proj/proj2000/tables/t11.htm> (16 March 2001).
10. "The Top 200 Drugs, Drugs Dispensed Most Often in U.S. Community Pharmacies, Total Prescriptions (New and Refill), 2,140,799 in Sample," American Druggist (February 1996): 19–20; "The Top 200 Drugs, Drugs Dispensed Most Often in U.S. Community Pharmacies, Total Prescriptions—New and Refill (2,248,672,000 in sample)," American Druggist (February 1997): 32, 34; "The Top 200 Drugs, Drugs Dispensed Most Often in U.S. Community Pharmacies, Total Prescriptions—New and Refill (2,355,489,000 in Sample)," American Druggist (February 1998): 4850; and "The Top 200 Drugs, Drugs Dispensed Most Often in U.S. Community Pharmacies, Total Prescriptions—New and Refill (2,486,066,000 in Sample)," American Druggist (February 1999): 42–43.
11. Technically, the result is obtained through division, not subtraction, since factors accounting for growth in spending are multiplicative, not additive.
12. American Druggist reports the original raw data for the top 200 drugs and the aggregate for the marketplace each year, along with statistics about how these numbers have changed over time.
13. Since drugs in a growth phase are more likely to remain on the top 100 list for two consecutive years, using a fixed basket of only those drugs that are among the top 100 drugs for two consecutive years would overestimate the spending increases.
14. It should be noted that we are basing projections off the CMS estimates to illustrate a potential range without the assumption that these estimates would represent the midpoints.
15. More detailed information may be obtained from <dmullins{at}rx.umaryland.edu>
16. The most recent year shows an increase over the previous year. The 2000 number is incorporated in the 7.5 percent compounded decline.
17. CMS, National Health Care Expenditures Projections Tables.

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