Physicians Among the Chief Drivers of High Drug Costs

Effects of cost control mechanisms on pharmaceutical use and costs

During the 1980s, expenditures on pharmaceuticals nationwide increased by 152 percent. HMOs implemented a number of cost-control mechanisms to slow the rate of growth of pharmaceutical expenditures, and were successful in doing so compared to fee-for-service health plans.

To determine why these costs are lower in HMO settings and to identify the factors that contribute to decreased drug use, from 1994 to 1996, investigators from the University of Pennsylvania School of Medicine examined the effects—in five network model and five independent practice association (IPA) HMOs—of:

  • Patient copayments.
  • Provider financial incentives.
  • Other HMO administrative controls.

This project was part of the Robert Wood Johnson Foundation (RWJF) national program Changes in Health Care Financing and Organization (HCFO).

Key Findings

  • The investigators found that drug expenditures are significantly higher in IPA-model HMOs where physicians are paid primarily on a fee-for-service basis than they are in network model plans where physicians are paid a capitated rate per patient and are financially liable for any pharmaceutical costs above that rate.

  • Patient incentives, such as copayments, also play a role; the higher the patient copayment, the less likely it was that spending on drugs occurred.