The next big challenge in the pharmaceutical sector is not going to be producing breakthrough treatments for once-deadly illnesses. The industry is on track to accomplish that with 3,400 medicines in development today in the United States alone, an increase of 40% since 2005. Forty-one new drugs were approved by the Food and Drug Administration in 2014, the most in 18 years.
Instead, the big challenge for the industry is proving the value of these new medicines to providers, patients, and payers who are concerned about the cost of the drugs. The challenge—and the opportunity—for the industry is to prove how new medicines improve patient outcomes and ultimately reduce other health spending.
Prescription drug spending continues to represent about one-tenth of $3 trillion in annual health expenditures in the United States. But red flags are being raised because the annual growth rate of drug spending spiked more than 13% in 2014, to $305 billion. That is partly attributable to increased prescription drug use among people who were newly insured under the Affordable Care Act. But as the accompanying chart shows, after rebates and other price concessions the estimated price growth for brand name pharmaceuticals was actually 5.5%. The annual growth in drug spending is expected to settle to the average growth of overall health costs over the next decade—about 6%.