Hospital and nursing home spending accounts for more than half of overall Medicaid spending growth.

As lawmakers struggle with finding ways to extend prescription drug benefits through Medicare or Medicaid many question whether the costs associated with improving prescription drug access are a worthwhile investment in the health care system. In fact, prescription drugs are one of the most cost-effective components of health care. New medicines that improve the quality of life of patients can also play a role in managing overall health costs by replacing or avoiding other more costly interventions such as hospitalizations and nursing home admissions.  

Although prescription drugs remain one of the fastest growing components of health care spending, the graph below clearly demonstrates that it is hospital and nursing home spending that is truly driving costs. In fact, Institutional Care accounts for more than 50 percent of overall Medicaid sending growth over the past five years. When preparing for future demand for health care services, policy-makers should plan to rely increasingly on prescription drugs to reduce institutionalization, improving the quality of life for patients and helping to effectively manage health care costs.