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How Depressed are U.S. Drug Consumers?


Rexford Santerre, John Vernon
Medical Progress Today
September 29, 2006

Few political issues generate as much fervor and public outrage as the perceived high cost of prescription drugs and the lack of universal drug insurance in the United States. In recent years, numerous legislative efforts have been undertaken to reduce the consumer misery associated with pharmaceuticals. Despite such efforts, the common perception is, and has been, that the situation is getting worse for U.S. consumers of prescription medicines. But has it? We recently conducted a study to determine if U.S. consumers of prescription drugs are more miserable today than they were five, ten, or twenty years ago. We accomplished this with a constructed index we call the Prescription Drug Misery Index (PDMI). The idea for our PDMI comes from Arthur Okun who, as economic advisor to President Johnson, created an economy–wide misery index by summing the general price inflation and unemployment rates in the U.S.

By construction, the PDMI captures prescription drug cost, access, and quality, the so–called "three–legged stool" of medicine, over the period from 1960 to 2004. It stands to reason that consumers are made worse–off when they face higher prices, pay a greater share of those prices out–of–pocket, and are offered fewer new life–saving drugs. All data come from government sources. Using a fairly sophisticated but common statistical procedure, we weighted these three components of the PDMI and added them together.

Our results for the PDMI are shown in the exhibit. It becomes immediately apparent that the historical pattern of the PDMI can be broken down into three distinct periods. During the first period from 1960 to 1980, consumers experienced a continual decline in drug misery. The decline in drug misery was largely a result of falling real drug prices and growing pharmaceutical insurance coverage during the first two decades. The second period from 1980 to 1994 reflects the opposite scenario: consumer well–being worsened during this period due almost exclusively to rapidly rising drug prices. Finally, 1995 to 2004 captures the third period. It is during this third period that consumer well–being was both at its highest level and relatively stable. Moderately rising drug prices, growing insurance coverage, and increasing new drug discoveries (except for the last few years) account for the low misery of drug consumers during this third period.

Readers may be asking themselves, at this point, why the U.S. government does not take direct steps to improve consumer misery by simply pushing down drug prices below their market levels. Trade–offs among cost, quality, and access provide a powerful explanation for why the federal government has been reluctant to impose drug price controls and also provides the reason why we computed the PDMI. Viewing one component in isolation does not tell the whole story about consumer misery.

For example, economic research suggests that the regulatory capping of drug prices at a point in time, while improving consumer welfare in the short-run, likely leads to a reduction in the number of new drugs over time because pharmaceutical companies face declining cash flows. Fewer new drugs worsen consumer welfare. This trade–off suggests that consumers would benefit from policies that reduce drug prices without compromising new drug innovation. Encouraging more competition in the drug industry may serve to maintain drug prices and instill increased innovation in the pharmaceutical industry. Another example of an important trade–off are attempts to promote increased insurance coverage for drug expenses. Although this reduces consumer misery at a point in time, it may lead to rising drug prices because it essentially allows people to shop with other people's money. Rising drug prices eventually make consumers worse–off. Once again, policymakers should seek a balance, by providing increased access to prescription drugs, but at the same time, by offering incentives for consumers to behave efficiently. The provision of drug insurance coverage to those currently without such coverage, and the implementation of optimal coinsurance rates for different types of drugs (e.g., generic versus branded) and individuals (e.g., young versus old, poor versus wealthy), may offer one way of striking that balance.

The prominent finding from our study is that, relative to historical "misery" levels, the current environment for prescription drug consumption and utilization is not that bad at all. In fact, relative to historical levels, things are quite good at present. Most importantly, our findings are at odds with the current common perception, which suggests that consumers of prescription drugs in the U.S. are in a bad situation that is growing rapidly worse.


Rexford E. Santerre, Ph.D. is a Professor of Health Care Management, Finance & Insurance at the University of Connecticut Center for Healthcare and Insurance Studies. John A. Vernon, Ph.D., is an Assistant Professor of Health Care Management, Finance & Insurance in the same program. This op-ed is based on their forthcoming paper, "How Depressed are U.S. Drug Consumers," in the Spring 2007 issue of the Journal of Health Care Finance. Advance copies of the paper are available from the authors upon request at mailto:jvernon@business.uconn.edu or rsanterre@business.uconn.edu.

 
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