Prescription medicines, including retail pharmacy sales and provider‑administered drugs, are only about 14% of overall healthcare spendingi—roughly the same share as in 1960. That spending has been remarkably stable, even though more than 450 new medicines have been brought to market for millions of suffering patients over the past 15 years, thanks to competition between branded drug makers in the same treatment class and the availability of low-cost generic drugs after a limited period of exclusivity for innovator products. What’s more, spending on prescription drugs is projected to grow in line with overall healthcare spending through at least 2024.ii

That’s because net prices and overall spending on prescription medicines have been rising modestly in recent years. In 2015, the average net price increase of branded drugs, after accounting for discounts and rebates paid by drug companies to government and commercial payers, was just 2.8%,iii while overall spending on prescriptions has increased just 3.9% during the year ending July 2016.iv

So where do most healthcare dollars get spent? Hospitals comprise by far the largest share, at about 30% of U.S. healthcare spending, or close to $1 trillion annually. Physicians and clinical services are another 20%. These health care services are also driving premiums increases for many insured Americans.

A study by Avalere Health reports hospital and professional services are responsible for approximately 75% of premium increases for those in the ACA insurance market. Data reported by health plans show that hospital costs and doctor payments accounted for 47% and 28.7% (respectively) in 2015, while prescription drugs accounted for 17.7.

That modest share of spending on prescriptions holds true even in very costly to treat conditions. A recent report on cancer care spending, for example, found that prescriptions accounted for just 12 percent of overall health costs for cancer, while hospital inpatient stays account for 27 percent, and hospital outpatient or office-based provider visits comprise 58 percent.v

How does U.S. spending on drugs compare to other developed countries? Quite favorably. Drugs, on average, make up about 20% of healthcare spending in OECD countriesvi, and can be as high as 30% in some EU countries.vii Thus, 14% in the United States is not high or unsustainable, and there is value in greater utilization of biopharmaceuticals as compared to other more expensive healthcare services such as hospital stays, surgeries, and nursing homes.  A smarter healthcare system would increase the use of cost-effective biopharmaceuticals, not seek to constrain or ration it.

Additional Reading & Resources

Drugs have been a relatively stable percentage of overall healthcare costs, and although spending has been increasing, prescription drug spending has not grown beyond that of other types of healthcare expenditures.

Drugs reduce the need for other more expensive healthcare services.

Innovative life-enhancing medicines and therapies provide to society economic value far beyond their cost.

Treatment has driven the vast majority of survival gains over the last few decades.