Tuesday, October 01, 2013

Public Funds and Exchanges Will Soon Overtake Employer-Sponsored Insurance

The state-level Health Insurance Marketplaces (HIM) launch today, so let’s look at who will be paying for our drugs as healthcare reform kicks in.

In The Outlook for Pharmaceutical Spending Through 2022, I examine the September 2013 drug spending forecasts from the Centers for Medicare and Medicaid Services (CMS). I crunched the numbers again and identified four key insights into the 2022 drug market:
  • Public funds, primarily Medicare and Medicaid, will pay for 42% of all drug spending.
  • Individually-purchased private insurance (via both public and private exchanges) will account for 5% of drug spending.
  • The employer-sponsored insurance market will keep shrinking.
  • Consumer out-of-pocket spending will drop to only 10% of drug spending.
The CMS projections are highly precise econometric guesswork. (Hello, dartboard!) Tomorrow, I’ll consider some uncertainties behind these forecasts.


I rely on the September 2013 National Health Expenditure Data projections. These data assume that the Patient Protection and Affordable Care Act (PPACA) gets implemented as expected. (Insert your own snarky comment about Obamacare's likely implementation.)

In Table 17 of NHE Projections 2012-2022, the industrious CMS wonks have separated private health insurance spending into two categories:
  • Employer-sponsored Private Insurance
  • Other Private Health Insurance, which includes Medicare supplemental coverage and individually purchased plans, including coverage purchased through the state marketplaces.
I refer to the second spending category as Individually Purchased Private Insurance. Within a few years, CMS projects, growth in this spending category will come from people who purchase private insurance via the new state-level Health Insurance Marketplaces (HIM), a.k.a. exchanges. (Tomorrow, I ask whether this spending is truly “private” insurance.)

CMS did not provide projections for drug spending within the two sub-categories of private health insurance. Therefore, I disaggregated total private health insurance spending using CMS’s enrollment data. I assume that total private insurance drug spending will be proportional to overall healthcare spending by people with (1) employer-sponsored private insurance vs. (2) individually-purchased private insurance.


The chart below summarizes payment sources from 1972 to 2022. (Click the chart to enlarge it.)

Here’s what CMS is projecting:
  • Public funds will overtake employer-sponsored spending. CMS projects that Medicare and Medicaid will grow to 42% of outpatient prescription spending in 2022, while employer-sponsored health insurance’s share will drop to 43%. Curiously, CMS projections don’t show any major shifts in 2018, which is when the excise tax on high-cost insurance plans begins.
  • Exchanges will account for at least 5% of drug spending. CMS expects enrollment in individually-purchased private insurance plans to grow, from 19.8 million people in 2013 to 32 million people by 2022. However, this figure is merely a SWAG. No one truly knows how quickly the public exchanges will be adopted.
  • Consumers will pay an ever-smaller share of drug spending. Consumer out-of-pocket funds—the sum of cash-paid prescriptions and consumer copayments—will decline from 16% of spending in 2012 to 10% in 2022, continuing a long-term trend. CMS has also reduced consumers’ out-of-pocket share vs. its previous forecast. Consumers’ absolute spending will decline, from $45.0 billion in 2012 to $38.1 billion in 2016. In 2017, CMS projects that consumer out-of-pocket expenses will then start growing again, to $47.3 billion by 2022. In absolute dollars, this figure is still below 2007’s peak of $51.8 billion.
Tomorrow, I’ll consider possible marketplace changes that could radically alter these projections.

In the meantime, what's on your mind about drug spending under healthcare reform?


  1. Adam, how is this going to affect manditory mail order and specialty pharmacy.

  2. I am curious how this will affect the practice model for PBM's who typically contract with employers. Certainly they are attempting to get into the exchanges, however, their account structure and relationships have typically been directly with employers. Now will they interact simply with the consultant groups and own geographic areas? I am having a hard time wrapping my mind around that.
    Additionally, I fear that our current actuarial models utilized for predicting rates offered and coverage will not be sufficient for the ACA landscape. While one could argue that the accounting for pre-existing conditions must be felt across the entire population, the overall OOP across medical and pharmacy combines is much less than we have traditionally seen. If it is an employer sponsored exchange with a pre-determined contribution the PBM or medical insurer will need to make up the difference.
    Finally, as employers are able to have a pre-specified contribution but also potentially face more in employment taxes will we see income rates increase or remain the same. It's difficult to tell at this time what the long term economic impact will be.

  3. As more employers drop health benefits, I'd imagine large health plans will gain significant leverage over PBMs. However, this may not be a bad thing for PBMs, as not having to deal with so many employer accounts with disparate needs will lead to lower operating costs; less client-specific customization, less marketing and sales overhead, and less IT. It may even lead to health plans going back into PBM business, bucking the recent divestiture trend.