A new study from the USC Schaeffer Center for Health Policy & Economics published in Health Affairs finds that prescription drug spending has become increasingly focused on highly novel drugs over the past decade. The research, announced on Aug. 3, indicates that this trend is primarily driven by increased prescribing of more innovative medicines rather than high prices for a small number of treatments.
The USC research team examined two decades of data covering approximately 600 newly approved small-molecule drugs, such as prescription pills. They developed a framework to assess each drug's novelty by analyzing molecular structure, biological targets, and therapeutic class using public databases and Food and Drug Administration files. The researchers then linked these findings with spending data from the Medical Expenditure Panel Survey and additional pricing information to estimate both gross and net revenues after manufacturer discounts.
To categorize novelty, the team measured how similar a new drug’s molecular structure was to existing treatments in its class, how many other drugs shared its biological target, and how unique its delivery or absorption method was. Each drug received ratings of low, medium, or high novelty across these three measures.
While previous increases in drug spending since 2013 have often been attributed to expensive breakthrough therapies like hepatitis C treatments introduced around that time, the study found that highly novel drugs were significant contributors to revenue growth both after and before 2013. Researchers also observed increasing revenue among innovative drugs introduced prior to 2013.
The shift toward greater spending on innovative medicines may be explained by pharmacy benefit managers’ growing use of restrictive formularies beginning around 2013. These managers negotiate coverage for health plans and tend to exclude drugs with multiple similarly effective alternatives from their formularies. As a result, more novel treatments are more likely to be covered widely by insurance plans—a dynamic which could incentivize manufacturers toward meaningful innovation.
"Our research shows that the market rewards different forms of pharmaceutical innovation and highlights how reimbursement and formulary decisions can shape whether novel medicines succeed in the marketplace," said co-author Boshen Jiao, a Schaeffer scholar and assistant professor at the USC Mann School of Pharmacy and Pharmaceutical Sciences.
