Do High Priced Drugs Drive Up Healthcare Spending?

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  • 11/30/2014

Recent critics of cancer drug prices claim that the new higher priced medications drive up  total health care spending.  

In fact, the opposite is the case.  The evidence is overwhelming.   In fact, the addition of new medicines under Medicare's drug plan (Part D) has led to an absoute reduction in what's been spent on Medicare overall, $380 billion less to be exact.    A recent Health Affairs blog notes:  "Much attention in particular has focused on the remarkable slowdown in Medicare spending over the past few years, and rightfully so: Spending per beneficiary actually shrank (!) by one percent this year (or grew only one percent if one removes the effects of temporary policy changes).

Yet the disproportionate role played by prescription drug spending (or Part D) has seemingly escaped notice. Despite constituting barely more than 10 percent of Medicare spending, our analysis shows that Part D has accounted for over 60 percent of the slowdown in Medicare benefits since 2011 (beyond the sequestration contained in the 2011 Budget Control Act)."

Critics will respond that the decline in Medicare spending was a function of the recession.  Not true.  "The recession and its aftermath appear to have had little effect on Medicare Part A and Part B spending; senior’s incomes are less influenced by economic downturns and the large majority of beneficiaries have supplemental coverage that shields them from most Part A and Part B cost-sharing. The primary analysis on the topic from CBO, in fact, found that only one-eighth of the slowdown in Parts A and B from 2007-2010 could be explained by factors related to the economy – and not through the usual channel of utilization impacts that take place in the private market."

Finally, some argue that the decline in spending was due to increased use of generic drugs on the part of Medicare consumers.  In fact,  most of the increase in Part D spending is the result of the use of new medicines for cancer, MS, diabetes and other drugs for the most expensive conditions Medicare patients deal with.  This is in line with studies conducted by Frank Lichtenberg and others showing that each dollar spent on new medicines reduces what would be spent on hospitals, doctors, etc. by $6.  

Looking at the price of a new medicine or what we spend on biopharmaceuticals in isolation is misleading.  Use of innovative  medicines should be looked at in terms of the impact it has on other medical spending and the lives of patients.   


Center for Medicine in the Public Interest is a nonprofit, non-partisan organization promoting innovative solutions that advance medical progress, reduce health disparities, extend life and make health care more affordable, preventive and patient-centered. CMPI also provides the public, policymakers and the media a reliable source of independent scientific analysis on issues ranging from personalized medicine, food and drug safety, health care reform and comparative effectiveness.

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