Thursday, June 21, 2012

Who Will Pay for Prescription Drugs in 2021?

In The Outlook for Drug Spending (With or Without ACA), I examine the latest drug spending forecasts from the Centers for Medicare and Medicaid Services (CMS). Today, I look at who will be paying for all of these drugs.

Here are four key insights about the 2021 drug market, assuming that the Patient Protection and Affordable Care Act (ACA) remains in place:
  • Public funds, primarily Medicare and Medicaid, will pay for 44% of all drug spending.
  • Insurance purchased via exchanges will be 5% of drug spending.
  • The employer-sponsored insurance market will keep shrinking.
  • Out-of-pocket spending by consumers will account for an even-smaller part of drug spending.
Read on for a look at the past, present, and future of payers. Pharmaceutical manufacturers need to consider how contracting will change as traditional private insurance declines. Meanwhile, PBMs will be gearing up as more people get coverage, although the business will shift to health plans at the expense of self-insured employers.


I once again rely on forecast data from the National Health Expenditure Data Projections page. The economists at CMS graciously provided me with certain unpublished data to compute the sources of payment if the ACA does not go into effect.

Note that I also estimated drug spending via private insurance purchased via exchanges. The PPACA’s growth in coverage is projected to come via state-run Health Insurance Exchanges (HIE), which are mandated to be a state-established governmental agency or nonprofit entity. CMS classifies coverage via HIE as "private insurance."

I find this classification to be a bit misleading about the sources of payment because a large portion of so-called private insurance coverage will actually be paid for by the government through subsidies. According to the CBO, 81% of individuals purchasing their own coverage through the Exchanges will receive federal subsidies that reduce the cost of purchasing health insurance coverage.

Therefore, I have estimated exchanges’ drug spending share using the CMS’ health insurance enrollment data. I assume that per-capita drug spending will be similar between people with employer-sponsored private and those with private insurance from an exchange.


The chart below summarizes payment sources since 1970.

Assuming that the ACA remains in place, here's what will happen:
  • Public funds, primarily Medicare and Medicaid, will pay for 44% of all drug spending. This level is actually below the government share of overall health care expenditures. By 2021, federal, state, and local government health care spending is projected to account for nearly 50 percent of national health spending.
  • Exchanges will be 5% of drug spending. The exchanges will be used primarily by the uninsured. However, some employers will stop offering health insurance and shift employees to the exchange plans. Some policy analysts expect only limited erosion in individual coverage via ESI, while others project 20% or more declines. Click here for a useful summary from Avalere Health.
  • The employer-sponsored insurance market will keep shrinking. In addition to the shift to exchanges, 2018 will see an excise tax on high-cost insurance plans. This will likely trigger a shift to lower-cost plans with tighter utilization management, narrower networks, or higher cost-sharing requirements.
  • Consumers will pay even less. Consumers’ out-of-pocket expenses—cash-pay prescriptions plus copayments and coinsurance—shrank from 87% of total U.S. retail prescription drug expenditures in 1970 to 2010’s record-low 19%. In 2010, consumer’s out-of-pocket drug spending dropped by $2 billion (-4.1%) in 2010, due primarily to the health care reform legislation. See Healthcare Reform Hits U.S. Drug Spending in 2010. By 2021, the consumer’s share will drop to a super-low 14% of spending, due to the subsidized exchange coverage and expanded Medicaid coverage. So much for skin in the game!
The last column in the chart above shows CMS’ unpublished estimates if the ACA is overturned. Public funds are still expected to crowd out private insurance, although the effect will be more modest. The consumer’s share will be higher due to loss of various subsidies.

Surprised? Delighted? Depressed? You have good reasons for all three feelings.


  1. Mike WinkelmanJune 21, 2012

    Good analysis, but I think you may have missed the mark as to consumer share.  Note that employers continue to shift the cost sharing ratios -- raising recipient contributions.  This will accelerate as Specialty Rx spending grows. We know that Pharma has shifted R & D to these SRX meds and shows blatant disregard for the economic impact of their aggressive pricing.  As a result, four and five tier copay plans are growing.

  2. Mike,

    These are the official CMS estimates. Under ACA, higher consumer out-of-pocket costs for specialty drugs are offset by generic drugs, subsidies, and the shrinking Part D donut hole. Plus, employers will be a much smaller share of the pie. That's why the government models show consumer share declining so much. Note that the consumer share is higher without ACA.


  3. Chris CobournJune 21, 2012

    Great article Adam, thanks.  I especially like the chart.
    This goes hand in hand with our focus at CIS on Government Programs (GP).  For years our focus in GP, working with the manufacturing community, has been on compliance.  We are talking more and more these days about the growth of the Government Customer, and recognizing the increasing importance of this market.  It is also important to recognize the relationship with the OIG's focus on program integrity.  As the government pays more for prescription drugs, they will put increased scrutiny on the integrity of the Government's price.  With a fiscal crisis at the Federal and State level, the government has to look at either 1) cutting eligibility, which is not too politically popular, 2) cut benefits, or 3) find more money.  And there has been a lot of money in "recovery" through audit and investigation.  So, for me the message in your blog translates to increased audit and investigative activity of pharmaceutical manufacturers.

  4. In your article you state, "I assume that per-capita drug spending will be similar between people with employer-sponsored private and those with private insurance from an exchange." Some experts have predicted that HIEs will actually be comprised of individuals who cannot obtain insurance through other means and those who are forced into them by virtue of employers dropping health insurance. It is not hard to imagine that many employers who have had known high insurance expenses would intentionally drop coverage, hence forcing more high-cost patients into the HIEs. Since the HIEs will be a small pool (at least initially) of potentially high cost patients, wouldn't this greatly inflate the per-capita spending as compared to all other methods of coverage? If that occurs, it is hard to see HIEs as being sustainable, particularly in less densely populated states.

  5. The initial enrollees will likely be primarily the uninsured. But by 2021, many of the people purchasing insurance exchanges will have been formerly covered by employer-sponsored insurance. So, I think it's a reasonable assumption, but you make a good point about possible adverse selection into the exchanges. 

    I also have my doubts about the viability of exchanges. Even the New York Times felt compelled to admit that the Masschusetts exchange is not working well. See Navigating the Health Care Maze.

  6. PUTT-Dave MarleyJune 26, 2012

    "PBMs will be gearing up as more people get coverage, although the business will shift to health plans at the expense of self-insured employers." just may be one of my favorite quotes of yours. Because, as PBM biz shifts away from the self insured, so too does the PBM's ability to fatten THEIR profits with spread pricing and deceptive contracts that occurs in the self insured market place. As I have said before, as employers learn more about these practices, the current big 2 will go the way of the dinosaur. DANG IT FEELS GOOD TO BE BACK!!