This working paper is part of the USC-Brookings Schaeffer Initiative for Health Policy, which is a partnership between the Economic Studies Program at Brookings and the USC Schaeffer Center for Health Policy & Economics. The Initiative aims to inform the national health care debate with rigorous, evidence-based analysis leading to practical recommendations using the collaborative strengths of USC and Brookings. This research was originally presented at the Bates White Life Sciences Symposium in Washington, D.C. on May 23, 2022. The PDF of this working paper was updated on October 21, 2022, to reflect a change in the description of what percentage of specialty drugs are included in the author’s data and calculations.
Prescription drug spending and drug prices are central to concerns about rapidly rising health spending. A variety of legislative proposals have been advanced aimed at reining in drug prices and drug price growth. The debate around these proposals is rancorous and frequently focuses on differing perceptions of how rapidly prices are growing.
Senior Fellow - Economic Studies
Professor in Applied Economics Emeritus - MIT Sloan School of Management
Statistician - Department of Health Care Policy, Harvard Medical School
One key source of information is the Department of Labor, Bureau of Labor Statistics’ (BLS’) Consumer Price Index (CPI), which includes a component that measures growth in prescription drug prices. The prescription drug component of the CPI has real world impacts as it is used to construct payment updates by insurers and regulators, is often a consideration in contract negotiations within the health care industry, and is used to estimate trends in National Health Expenditures and its components.
But there are reasons to suspect that the CPI has not been a good measure of actual trends in prescription drug prices. Most importantly, the CPI almost surely misses a large share of specialty medicines. Specialty drugs, such as those that treat cancers and immune system disorders, carry high prices, have experienced high rates of price and spending growth, and have claimed a rapidly growing share of drug spending, reaching 55% of U.S. drug spending in 2021, nearly double the share from ten years prior.
In the analysis that follows, we assess how the treatment of specialty drugs in the CPI affects growth in measured prescription drug prices. We conduct this assessment using data from large insured populations covered by employer-sponsored health insurance. While this is not a fully comprehensive analysis of all purchases of prescription drugs, it offers informative insights into how data on prescription drug prices are collected and used to understand prescription drug price changes. We note that the analysis is geared towards the approaches used to calculate the prescription drug CPI. We do not take up issues related to accounting for product quality in this analysis.
The results demonstrate that considerable caution should be taken in interpreting the prescription drug component of the CPI as a comprehensive reflection of price growth in those markets. This is because the shift to specialty drugs involves dispensing by specialty pharmacies, hospitals, and physician offices – sites that are frequently not included as part of the prescription drug CPI that is confined to surveys of retail outlets. Instead, drug prices have increasingly become a component of the price indexes for hospitals, physician offices, and other health care settings.
The remainder of this manuscript is organized into three additional sections. Section II provides a detailed analysis of the role of the prescription drug CPI in the larger construction of the nation’s CPI. That section also offers a detailed description of how the prescription drug CPI is constructed including the approach to data collection and the weighting schemes used to aggregate a complex set of products. Section II also provides detailed evidence on how different types of prescription drug products are incorporated into the various component indexes. That evidence offers the basis for a hypothesis about potential distortions in the existing prescription drug CPI. Section III describes and conducts an empirical analysis that compares the application of the current CPI methodology to one that more completely takes account of the evolution of prescription drug markets. Finally, section IV summarizes the results and considers implications of the findings for ongoing policy debates and our understanding of prescription drug price behavior.
The full paper is available here.
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Report Produced by USC-Brookings Schaeffer Initiative for Health Policy
This research was supported by a grant to the Department of Health Care Policy, Harvard Medical School, from Arnold Ventures. Ernst Berndt has received consulting fees from Bates White Economic Consultants, working for Optum, a subsidiary of United Health Care, on a litigation matter, as well as from Cornerstone Research, working for Perrigo, a manufacturer of over-the-counter pharmaceutical products, on a litigation matter. Other than the aforementioned, the authors did not receive financial support from any firm or person for this article or from any firm or person with a financial or political interest in this article. The authors are not currently an officer, director, or board member of any organization with a financial or political interest in this article.
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