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Overall Price Increases for Retail Prescription Drugs Have Been Below General Medical Inflation

2DG Overall Price Increases For Retail Presc FOR RELEASE
Director Private Health Reform Initiative at Paragon Health Institute
Theo Merkel is the Director of the Private Health Reform Initiative and a Senior Research Fellow for the Paragon Institute and a Senior Fellow at the Manhattan Institute.
Senior Research Fellow at Paragon Health Institute
Drew Gonshorowski is a Senior Research Fellow at Paragon Health Institute. He brings a decade of experience conducting quantitative research and building models examining health policy and entitlement programs.

As Chairman Bernie Sanders and the Senate HELP Committee turn to another hearing on the price of prescription drugs tomorrow, it is worth noting that over the past 20 years prices of retail prescription drugs have increased at a slower rate than health care prices generally and much slower than hospital prices.

This week’s Paragon Pic shows the increase in the prescription drug component of the Consumer Price Index (CPI-Rx) produced by the Bureau of Labor Statistics compared to hospital services, physician services, general medical inflation, and general inflation.

CPI-Rx only applies to retail pharmaceuticals — drugs that someone purchases at the pharmacy counter. While CPI-Rx captures most drugs and most drug spending (and encompasses all the drugs initially subject to negotiation under the Inflation Reduction Act), it excludes some of the highest-priced, often lower-volume drugs that are administered by a physician. CPI-Rx accounts for the substitution of generic drugs, so it accounts for cheaper alternatives becoming available and being used. Finally, CPI-Rx is a measure of what is actually paid at the pharmacy counter — including out-of-pocket spending — as opposed to the list price. A limitation of CPI-Rx is that it does not include discounts or rebates that are executed post-sale — so the measure may overestimate price increases as these types of discounts and rebates have grown over time.

CPI-Rx is a superior measure than what is typically cited by Chairman Sanders or reported in the press — the annual round of list price increases that occurs at the beginning of each year. List prices do not include negotiated discounts and are not as important as what the patient ultimately pays.

So why do prescription drug prices dominate the news and the press releases of politicians while hospital price increases get less attention? Prescription drug spending is much more routine for patients, especially seniors, than hospital visits. Furthermore, out-of-pocket spending on prescription drugs averages around 14 percent whereas it is 3 percent for hospital spending, so patients are far more conscious of how much they are spending on prescription drugs.

The relative sensitivity of patients to prescription drug prices in comparison to hospital prices and the fact that hospital prices have increased at a faster rate are related. Patients almost always choose the more affordable prescription drug option if it is available to them because they feel it in their pocketbooks. Patients are typically more insulated from hospital prices, and this dampens the incentive to shop for care and it contributes to not only higher prices but also higher insurance premiums.

This figure drew inspiration from the “Chart of the Century” by Mark Perry of American Enterprise Institute. In that chart, Perry demonstrates prices in areas of the economy subject to government regulatory capture have increased dramatically over the past 20 years while there have been real price declines, not to mention significant quality improvements, in areas with less government intervention.

Read more about CPI-Rx in this 2019 report from the White House Council of Economic Advisers.

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