CBO Looks at Pharmaceutical R & D

By November 24, 2009Commentary

The flattening of spending on prescription drugs has been a health care cost control success story, especially since that reduction in spending appears to not have had negative effects on quality.  The Congressional Budget Office has issued a brief report (CBO Report) examining trends in drug spending, policy changes which might impact that trend and how changes is spending might affect research and development expenditures by pharmaceutical manufacturers.

Drug spending grew by about 11% annually from 1994 to 2004, but has dropped to about a 3.2% growth rate since then, less than overall health spending increases.  Drug expenses as a portion of total spending have been steady at about 11% since 2004.  The number of prescriptions has continued to increase but cost per prescription has declined, due to the rapid growth in use of generics, going from 42% of prescriptions in 2000 to 58% in 2007.  Much of this change is due to more blockbuster drugs coming off patent than are being approved by the FDA.

As revenue has slowed, so has R & D spending.  The increase in R & D in 2008 was about 2.6%, far below the thirty year average increase of 9%.  CBO explains variation in R & D spending largely by looking at revenue trends.  Policy changes that might expand revenue, such as more people covered by insurance, might increase R & D expenditures.  Changes that might reduce revenue, higher rebates to public programs for example, would likely decrease it.  Instead of, or in addition to, revenue, CBO might be well-advised to look at profits.  While R & D investments can be judged to some extent on revenue, what companies are really interested in is profit and no amount of low or non-profitable revenue is going to spur investment.

The CBO report also notes that the federal government currently pays for 29% of total prescription sales, a figure that has doubled in five years.  This likely means that issues related to drug pricing and drug development and approval will be increasingly politicized, also not a recipe for increasing R & D investments.  Drug companies, whatever their faults, tend to provide very well-paying, clean jobs.  At a time when job growth is looking very hard to achieve, a reduction in pharmaceutical R & D is probably not good for the economy.

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