The effects of inflation, generic competition, and the introduction of new drug entities on future drug expenditures are discussed. The impact of inflation can be predicted by analyzing trends in historical data and determining factors that may affect drug use. Useful sources include U.S. Bureau of Labor Statistics Producer Price Index figures for pharmaceuticals, commercially available data on drug product pricing, and market basket indices compiled by the Health Care Financing Administration (HCFA) and the American Hospital Association. HCFA predicts that quarterly increases in pharmaceutical prices in 1992-93 will range from 6.4% to 8.1%. Pharmaceutical industry analysts predict overall annual inflation rates for pharmaceuticals in 1991-92 ranging from 8% to 10%. To evaluate generic competition, information on the expiration of patents and market exclusivity can be used. Decreases of 30-70% in the list price of a drug product can be expected after the introduction of a generic product, and the price usually stabilizes at approximately 50% of the list price of the innovator product at the time the first generic product was marketed. Predicting when new drug entities will be introduced is difficult; analysts say the usual time from filing of a new drug application to FDA approval is two years. The FDA says approval usually follows within a few weeks after an advisory panel's recommendation for approval, and marketing can be expected within a few months after final FDA approval. Assumptions about future drug expenditures should take into account historical and predicted rates of inflation, the status of generic competition for existing products, and the prospects for introduction of new drug entities.(ABSTRACT TRUNCATED AT 250 WORDS)