Tuesday, January 12, 2010

Drug Forecasts: Oops!...They Missed It Again

The boffins at the Centers for Medicare & Medicaid Services (CMS) just released their annual computations of National Health Expenditures (NHE), including the latest figures for prescription drugs.

Two notable highlights that I haven't seen mentioned elsewhere:
  • CMS’ projections for the growth of drug spending have been much, much higher than actual growth rates—even for forecasts made only two years ago. As someone who makes his living from the crystal ball, I understand that sometimes you need to eat broken glass. But the disparity is quite striking and so far unexplained by CMS.

  • The data confirm last year’s projection that Federal and state governments are becoming the primary payers of outpatient prescriptions. A major downside to this government takeover is the risk that budget pressures could encourage the government to dictate or mandate lower payment levels for pharmacies. Be careful what you wish for, health reform fans!
Here are links the original data sources in case you want to check my math:

The table below compares the actual growth rates in the latest NHE data with annual projections made by the Office of the Actuary in CMS during its three most recent forecasting attempts. The “n.a.” indicates CMS had actual growth rates for those years instead of projections.

As you can see, actual growth in drug spending has been far, far below CMS projections. For example, CMS' 2007 forecast called for 7.9% growth in drug spending in 2008. Actual growth turned out to be less than half of that rate (3.2%).

Perhaps CMS will enlighten us on the differences when they release the next set of NHE projections in February. CMS may pin the blame on the recession, but I think the primary factor was their underestimation of generic dispensing rates and the corresponding deflation in drug trend.

FYI, the big 3 pharmacy benefit managers (PBMs) retrospectively computed the 2008 drug trend to be around 3%. See Specialty Spending Soars (for now).


The chart below shows how the payment source for outpatient prescription drugs (share of dollars) has changed since 1968. Public funds—Medicare Part D, Medicaid and State Children’s Health Insurance Program (SCHIP)—are crowding out both public and out-of-pocket payments. Public funds paid for 37% of total retail drug spending in 2008. The private health-insurance share peaked in 2001 at 50% and has been declining since then.


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 spending for inpatient drugs in other NHE categories because spending is bundled with inpatient procedure fees. For example, some portion of "Hospital care" (and other NHE categories) also include an unknown amount of drug spending. CMS does report Medicare Part B outpatient spending, but only retrospectively and with a few years lag.

CMS’ estimates for total outpatient drug spending are consistently lower than estimates from private sources, while CMS’ estimates of growth rates tend to be higher than the growth rates reported by private sources. For instance, CMS estimates that outpatient drug spending was $234.1 billion in 2008 versus an estimate of $253.6 billion from NACDS. I believe that CMS underestimates prescription sales in food and mass channels. Why? Technically speaking, the current NHE Prescription Drug series is benchmarked to product line sales data from the 2002 Economic Census of Retail Trade (NAICS 44-45), which appears to underestimate prescription sales in non-pharmacy-dependent retailers. The 2007 economic census data should be available soon and will probably be incorporated into NHE by 2011. I expect an upward revision to the historical NHE data when that occurs.


P.S. The classic (circa 2000) Britney Spears reference above should tip you off that I have a 13 year-old daughter in my house!


  1. Great insights. Maybe health care reform will cost less than expected?

    Just kidding.

  2. The over estimation of drug spend does occur, as Adam stated, because of unexpected high use of generics by the CMS population. This occurs due to the threat of the “Doughnut Hole”, financial incentives to move health care cost do work. The talk of eliminating the doughnut hole would have the opposite effect, causing CMS projections of drug spend to be under estimated, as the CMS population would rapidly return to brand only designations. If looking to do something cost effective and positive for the CMS population, reform should look at drugs related to chronic and rare diseases.
    Jim ApproRx

  3. Hi Adam-

    Nice post today. One thing that struck me in the chart you posted was that the 08 numbers indicated that 21% of the retail spend is consumer OOP. Any idea whether that includes just the cash-paying customers (i.e., those uninsured, in the donut hole, high-deductible plans, etc.) or whether it includes the cost of co-pays/co-insurance too?

    I would have thought that the percentage of cash-paying customers is lower, which stems from research I've been doing on cash discount cards. Do you have any sense/opinion of that market? I know that independent pharmacists are generally opposed to such cards because the discounts potentially could eat away at their cash business, but I also think that those pharmacies' prices are in many cases equal to or lower than the discounted prices negotiated by the card offeror with the PBM administering the benefit.

    Thanks again.


  4. Like IMS forecasts are any better?

  5. Mark,

    As I understand CMS' computations, consumer out-of-pocket includes the sum of co-payments and cash-paid prescriptions. The latter make up about 10% of scripts filled.

    I presume that pharmacist's don't like cash discount cards because profits are higher from cash-paying customers. See the section called "Profitability of Brand vs. Generic Prescriptions" in my pharmacy industry economic report for details.


  6. “…sometimes you have to eat broken glass.” Excellent. And the Brittany album cover was brilliant. You would make a good consultant for someone!