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September 1998, Vol. 121, No. 9
Ernst Berndt, Iain Cockburn, Douglas Cocks, Arnold Epstein, and Zvi Griliches
Over the next few decades, the U.S. population aged 65 and older will grow, both in absolute numbers and as a share of the total population. As people age, they tend to have higher medical care expenses. Thus, an increasingly elderly society can be expected to devote a greater amount of its expenditures toward medical care. The implications of a graying society for future medical care expenditures will depend, of course, both on the price and on the quantity of future medical care for the elderly.
To the extent that they live on fixed incomes, the elderly are particularly vulnerable to price inflation. However, relatively little is known about the extent to which price inflation of the basket of medical care goods and services used by the elderly differs from the price inflation of the set of medical care goods and services used by younger Americans. To address this issue, we focus on elderly-nonelderly price inflation differentials for one component of medical care—namely, prescription pharmaceuticals—from 1990 to 1996.1
Background and concepts
Elderly-nonelderly differentials in drug price inflation could reflect brand-generic
consumption proportions that vary by age. For treatment of acute conditions, the elderly
may be more fragile, and prudent medical practice might suggest prescribing for them the
newest generation of drugs having the fewest side effects, the least adverse drug
interactions, and the most convenient dosing. Thus, for certain acute conditions, one
might expect the elderly to be disproportionate users of newer, branded drugs. To the
extent that such drugs increase in price more rapidly than older off-patent and generic
drugs, the cost of the elderly’s bundle of drugs would be expected to increase more
rapidly than that of the young.
Although the same considerations would apply for treatment of chronic conditions, the surviving elderly are more likely to be using older drug products, because physicians are hesitant to change medications when an existing drug regimen is working well in treating a chronic condition. With "stickier" usage patterns and by surviving to old age, the elderly would therefore disproportionately use older drugs to treat their chronic conditions, drugs that are more often available as generics. Under this hypothesis, price inflation for the elderly’s bundle of drugs would be less than that for bundle purchased by the young. We examine both these hypotheses empirically, focusing on three therapeutic classes—antibiotics, antidepressants, and calcium channel blockers.
The systems by which prescription pharmaceuticals are distributed and paid for in the United States are complex and rapidly changing. We assess elderly-nonelderly price differentials at three different points in the distribution chain: (1) the initial point, involving sales from manufacturers to wholesalers, retailers, and hospitals; (2) an intermediate point, retail sell-in, at which retail pharmacies acquire prescription drugs from wholesalers and manufacturers; and (3) a final point, retail sell-out, at which retail pharmacies dispense and sell prescription drugs to patients. At the retail sell-out point in the distribution chain, we attempt—to the extent that available data permit—to distinguish consumers’ out-of-pocket expenditures for pharmaceuticals from those expenditures involving government funds (Medicaid and various public assistance programs), as well as from payments by private third-party insurance sources (fee-for-service insurance plans and various forms of medigap and managed care).
This excerpt is from an article published in the September 1998 issue of the Monthly Labor Review. The full text of the article is available in Adobe Acrobat's Portable Document Format (PDF). See How to view a PDF file for more information.
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Footnotes
1 For a discussion of patterns in total acute care health expenditures by patient age group from 1953 to 1987, see David M. Cutler and Ellen Meara, "The Medical Cost of the Young and Old: A Forty Year Perspective," Paper presented at the April 1997 National Bureau of Economic Research Conference on Aging, Boulder, CO.
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