The boom in new drug development, combined with an aging and well-insured population, brings good news and bad news.

The good news is that many groundbreaking drugs are available to help people live longer, healthier, more productive lives. Through drug therapy, millions are for the first time finding relief from conditions such as diabetes, depression, ulcers, high cholesterol, and chronic pain. New drugs can help many patients avoid hospitalization or shorten their hospital stays.

The bad news is that pharmaceutical spending has been escalating at uncontrollable rates. Drug spending increased by 17 percent last year nationwide and at roughly the same rate across the board for the University's health care plans. Since 1992, drug spending in the U.S. has doubled, according to IMS America, a company that provides data on the pharmaceutical industry. In 1999, Americans spent about $120 billion on prescription drugs, according to PCS Health Systems, one of the three largest pharmacy benefits managers in the United States.

The Benefits Office projects the University's prescription drug costs will total about $29 million for 2000. That figure includes prescription drug coverage for 31,000 employees and retirees enrolled in U-M health plans. It also includes drug costs for employees' covered dependents, which brings the total of "covered lives" to about 78,000. The projections are drawn from rate and 1999 utilization data.

Moreover, drug spending has been rising at a higher rate than all other segments of health care. Last year, prescription drug costs accounted for 12-15 percent of total health plan costs and for half of all premium increases, according to Managed Care. By the end of 2000, U-M's prescription drug costs will comprise about 22 percent of the University's total health care cost of approximately $129 million.

For each U-M health plan member, the average copay cost per year is $80, which amounts to about .178 percent of a $44,900 salary and .305 percent of a $26,200 salary. The University's cost: an average of $370 per year for each covered employee's and dependent's prescriptions.

Most medical professionals believe the benefits of effective drug therapy justify increased spending. Yet many also observe that caregivers and consumers, given incentives and education, could be making more cost effective choices about prescription drugs.

John E. Billi, Associate Dean for Clinical Affairs at the Medical School, would weigh the cost of specific drugs with the value they contribute to overall health care.

"The increases are clearly beneficial when they are used to replace more expensive and invasive therapy---such as a cholesterol lowering drug that helps prevent heart attacks," he said. "The individual benefits from living longer, of course, and society benefits because it is saved the cost of expensive techniques such as coronary bypass grafts. Heart disease and stroke are the most common causes of death in Michigan. In this case, we all get the money back."

The same holds for mental health care in the case of new atypical antipsychotic drugs, Billi said. These drugs are expensive but very effective and have fewer side effects than older drugs used to treat psychoses. The new drugs are helping people who previously would have required in-patient hospitalization.

"But not all of the higher costs give value," he said. "For example, patients with allergies ask their doctors for prescriptions for non-sedating antihistamines, which are very expensive and have potential for drug interactions. Yet most patients could start by trying an inexpensive over-the-counter antihistamine, which is easy to tolerate and has proven effective for allergies. Some doctors will order the prescription drug without going through the debate of trying the OTC first."

In the end, unnecessary use of expensive prescription drugs leads to increased copays and less coverage for consumers, more restrictions and higher premiums, he said. "Lowering drug costs takes a multi-faceted approach that involves patients working together with doctors and pharmacists."

While not all health care plan administrators and employers have reached a consensus on solutions, most agree on what forces are driving increased spending.

--An aging population requires more and more drugs in classes such as arthritis, high cholesterol, high blood pressure, diabetes, Alzheimer's, and ulcers. Members of U-M's M-Care senior plan averaged more than 25 prescriptions per year in 1999, compared to the average of 9.8 per year for all members across health plans.

--The new drugs that are constantly pouring into the market are much costlier than established drugs. In 1998, the average cost of a new drug prescription was more than twice the average for older drugs. The anti-depression drug Prozac costs $2.36 per day compared to its predecessor amitriptyline, which costs $0.17 per day. Costs in some drug classes, such as arthritis and ulcers have increased 25 to 55 percent in just one year, due to innovative new drug therapies, according to IMS America.

The average cost per prescription is $41.42. That price reflects the low (often below $20) cost of generic (no brand) drugs, which comprise about 40 percent of the prescription drug market. The average brand drug now costs about $70.

--Increased utilization naturally increases spending. Due to increased third party coverage and aggressive diagnosis and prevention, more people of all ages are using more prescription drugs than ever. The number of drug prescriptions dispensed totaled nearly 3 billion nationwide in 1999, according to the National Association of Drug Stores Inc. Employees enrolled in all the U-M's health plans accounted for nearly 600,000 of those. The Benefits Office projects that total will be 700,000 for 2000.

--Direct-to-consumer advertising (DTCA) has had enormous impact on drug utilization. Until 1997, pharmaceutical companies advertised their products mainly within the medical industry. That year, the Food and Drug Administration substantially liberalized its policy on advertising prescription drugs in the mass media. Consumers are now bombarded with television, Internet, and magazine advertisements for drugs from Claritin to Viagra. Pharmaceutical manufacturers spent about $1.3 billion on advertising in 1999 and expect to spend $2 billion in 2000.

Few physicians are big fans of direct-to-consumer advertising. "I am a fan of well-educated patients," said Billi. "The problem with DTCA is, I have to spend time undoing the damage television advertising has done for some. They see a person running through a field of wildflowers in an ad for Claritin (a prescription antihistamine), then come in and ask for it without ever having tried a cheaper drug regimen that might cost just pennies a day."

The University's prescription count and rate of cost increase for prescription drugs reflects the national average. Yet it is slightly lower than those of some other large Michigan employers, said Jon Clement, Head of Health Care and Group Benefits for William Mercer, Inc., the University's prescription drug benefits consultant.

"The U-M has a significant but relatively small retiree population compared to the Big Three and old-line auto suppliers," he said. "They have enormous numbers of retirees so their prescription drug costs rose closer to 25 percent last year."

The next article in this series will describe some cost containment strategies organizations are using to manage prescription drug costs.