Wednesday, June 20, 2012

The Outlook for Drug Spending (With or Without ACA)

Soon, we'll all learn the Supreme Court’s decision about the Patient Protection and Affordable Care Act (ACA). On a bed of nails, they make us wait.

To pass the time, let’s look at the brand-new forecasts for health care spending from the Centers for Medicare and Medicaid Services (CMS). The complete forecast is summarized in the latest Health Affairs: National Health Expenditure Projections: Modest Annual Growth Until Coverage Expands And Economic Growth Accelerates (free download).

My number crunchification uncovered the following data points about drug spending:
  • By 2021, annual prescription drug spending will nearly double, to $483.2 billion.
  • In 2021, prescription drugs will account for 10.1% of total U.S. health care spending, vs. 10.0% today.
  • Health care reform will add an extra $25.9 billion in annual drug spending by 2021.
CMS has reduced its growth forecasts substantially due to ongoing economic weakness. Read on for the factors behind the new forecast, both with or without ACA.


CMS’ economic boffins publish annual projections for U.S. National Health Expenditures (NHE), including prescription drugs sold through outpatient retail or specialty pharmacies. You can download all forecast data from the National Health Expenditure Data Projections page.

NHE totals are net of manufacturer rebates, so the reported figures are lower than prescription pharmacy sales. Thus, expenditure (spending) data is roughly equivalent to total pharmacy revenues minus manufacturer rebates. Wonky readers can savor pages 13-14 of the National Health Expenditure Accounts: Methodology Paper.

FYI, NHE does NOT measure total U.S. spending on prescription drugs. Sales through outpatient retail channels are only about 75% of total pharmaceutical manufacturer sales. Unfortunately, there is no way to figure out drug spending in other NHE categories because spending is bundled with inpatient procedure fees. For example, some portion of "Hospital care" includes an unknown amount of drug spending.


Annual expenditures will not quite double in the next 10 years, to $483.2 billion by 2021. Due to the PPACA, retail drug spending is projected to be $25.9 billion (+7.2%) higher in 2021 than it would have been without healthcare reform.

CMS attributes the ACA’s utilization boost to three factors:
  • The addition of newly-insured consumers—CMS projects that the number of uninsured Americans will drop, from 2011’s 47.4 million (13.9% of the population) to 2021’s 23.1 million (6.1% of the population).
  • People will move to more generous, subsidized insurance plans—CMS projects that 23.4 million people will get insurance via the new Health Insurance Exchanges (HIE). The CBO estimates that about 8 out of 10 people purchasing their own coverage through the exchanges will receive a government subsidy.
  • The Medicare Part D donut hole shrinks—In 2013, coinsurance rates for brand-name drugs will be 97.5%, dropping to 75% by 2020. Enrollee copays will be 25% of total drug costs with the 50% discount. Coinsurance rates for Medicare Part D enrollees who fill generic drugs will drop to 93%, then decrease incrementally each year until they reach 25% in 2020.

Last July, CMS made the following (more optimistic) projections:
  • By 2020, total retail drug spending would be $512.6 billion
  • The ACA would add $35 billion to drug spending by then. 
So, what happened?

Oh, just a wee little recession and a weaker-than-normal recovery. For private health insurance, CMS points to three factors:
  • “First, consumers are expected to remain sensitive to rising health costs, particularly given continued low projected income growth. In this environment, consumers are likely to continue to be judicious in their use of health care services."
  • "Second, employers are expected to continue to focus on controlling costs through tighter management of care within health plans, narrow network availability, or higher cost sharing."
  • "Third, slower growth in prescription drug spending is projected as a result of patent expirations for key drugs in 2011 and 2012.”
The chart below compares the annual growth rates in the July 2011 and June 2012 forecasts. (Both forecasts include the impact of the ACA.) In the current forecast, drug spending will grow at a compound average rate of 6.0% from 2011 to 2021—just a hair above the growth rate of overall health expenditures.

As you can see, CMS has lowered its forecast by 2 to 3 percentages points for 2010 through 2013, and by less than 1 percentage point in later years of this decade. Compounding of small growth rate changes translate into about $30 billion less in total retail sales by the end of the decade.


Tune in tomorrow, when I'll look at who will be paying for all of these drugs. The answer may not surprise you, but it might depress you.

Until then, check out this interesting video that analyzes the timing of the Supreme Court's decision.

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