Annual inflation in drug costs in the US is at the lowest rate in the last three decades and the phenomenon could be attributed to generic versions of common drugs hitting the market in a big way.
"The way the index is going, it looks like drug price increases are not going to be very painful this year," said Daniel H. Ginsburg, a supervisory economist at the Bureau of Labor Statistics said Wednesady.
As recently as 2005, inflation in drug prices was running at an annual rate of 4.4 percent.
Economists trace the turnaround to the emergence of the generic versions of some of the most common drugs.
In the past year and a half alone, generic equivalents have become available for the cholesterol treatment Zocor, the sleeping pill Ambien and the blood pressure drug Norvasc.
Another factor could be the so-called Wal-Mart effect. Last fall, Wal-Mart began offering many generic prescriptions at $4 a month. Publix, a grocery store chain with 684 pharmacies in five states in the Southeast, announced last month that it would not charge for prescriptions for seven commonly used antibiotics. Others followed suit.
To be sure, the government still expects spending on medications to rise, to nearly $500 billion a year within a decade, up from an estimated $275 billion this year. That will happen as more people take more drugs and as new drugs are introduced. Also, costs are likely to soar in some specialized categories like cancer treatments and biotechnology drugs.
And yet for the average household, the drug index is perhaps a better reflection of the actual day-to-day impact of prices for their most commonly used drugs, like antibiotics, blood pressure pills and cholesterol medicines. According to the nonprofit Kaiser Family Foundation, in 2006 the average brand-name prescription cost more than three times the average generic: $111, compared with $32.
But now, tamer drug inflation could add credibility to the platforms of presidential candidates who have embraced generics as part of a solution to rising health care costs.
Generics made up 63 percent of prescriptions dispensed in the United States in 2006, up 13 percent from 2005. And these days, the country's biggest supplier of prescription drugs, as measured by prescriptions filled, is not a high-profile American company like Pfizer or Merck. It is Teva Pharmaceutical, a generic manufacturer based in Israel.
A Labor Department economist, Francisco Velez, said his office noted a drop in generic drug prices shortly after the large stores' promotions began, particularly in the South, where Wal-Mart started its program. His colleague, Mr. Ginsburg, called the drop in prices for generic drugs "dramatic." Wal-Mart and other large chain stores make up 15 to 20 percent of the pharmacies that the government surveys for the index.
The fourth quarter of 2006 was the first time in several decades that the index registered three consecutive months in which prices declined. Mr. Ginsburg said that the effect of the promotions by large retailers could be a one-time phenomenon, unless the companies decide to expand the number of drugs they discount.
Although the Consumer Price Index is only one measure of prescription drug inflation, Medicare has also reported slower increases in spending on prescriptions, beginning in 2003 and continuing through 2005. The 2006 numbers are not yet available.
Despite the slowed inflation recorded by the index, overall spending for pharmaceuticals is still on the rise, up 8.3 percent in 2006, according to IMS Health, a firm that tracks market trends. And that is unlikely to diminish anytime soon, as an aging population faces increasing health problems. According to Medicare, there have been great increases in the use of drugs for the cardiovascular and central nervous systems and for Type 2 diabetes.
High prices for new cancer drugs are also driving up spending, and pharmaceutical companies are collecting healthy profits.
At the same time in the case of specific drugs that are near the end of their patent life, the manufacturers are trying to think about how to hang on to sales. The only way they can do that is to offer deeper rebates so there isn't as much interest in generics.
There are some who question the actual impact of the Wal-Mart's initiative. But then there is the bandwagon effect perhaps.
Sharon Treat, the executive director of the National Legislative Association on Prescription Drug Prices, a coalition of state and local policy makers said that publicity about Wal-Mart's plan had raised awareness of generics.
"I think it may be having a spillover effect psychologically," Ms. Treat said. "Folks are seeing generics as more acceptable than they had."