Tuesday, September 09, 2014

CMS Forecast: Big Drug Spending Growth, But Hospitals and Doctors Will Still Capture Most Healthcare Spending

Last week, the Centers for Medicare & Medicaid Services (CMS) released its latest forecasts for national health expenditures. The forecast is summarized in a new Health Affairs article: National Health Expenditure Projections, 2013−23: Faster Growth Expected With Expanded Coverage And Improving Economy (free download).

I crunch the prescription drug forecasts below. In 2013, prescription drug spending growth was again slower than the growth in total U.S. spending. Growth will accelerate as insurance coverage expands, the generic wave ends, and newer specialty drugs launch. By 2023, the U.S. will spend nearly $500 billion on drugs.

Despite this impressive growth, outpatient prescription drugs will account for less than one of every 10 U.S. healthcare dollars. Hospitals and physicians will remain at almost 60% of U.S. healthcare spending—or about six times as much as spending on pharmaceuticals.


CMS’ economic boffins publish annual projections for U.S. National Health Expenditures (NHE), including prescription drugs sold through outpatient retail, mail, and specialty pharmacies.

Expenditure (spending) data differ from that of pharmacy revenues, manufacturer sales, and provider purchases. NHE totals are net of manufacturer rebates, so the reported figures are lower than pharmacies’ prescription revenues and IMS Health data. The NHE data also do not measure total U.S. spending on prescription drugs, because these data exclude an indeterminate amount of inpatient spending on pharmaceuticals. Thus, U.S. drug spending in the NHE is roughly equivalent to total outpatient pharmacy revenues minus manufacturer rebates.

Historical and projected data files are available on the CMS National Health Expenditure page.


The chart below presents our analysis of the most recent forecasts for annual growth in total national healthcare expenditures and outpatient prescription drugs.

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CMS estimates that outpatient prescription drug spending increased to $272.1 billion in 2013, up 3.3% compared with 2012. Annual U.S. prescription drug expenditures will grow by $210.7 billion (+77%), to $482.7 billion in 2023.

Here are the other key components of the forecast period:
  • After 2013, prescription drug spending growth is projected to accelerate, to 6.8% in 2014 and 6.4% in 2015. This growth will result from uninsured Americans gaining health insurance through Medicaid and private health insurance plans (including those available through the health insurance Marketplaces). CMS also points to high drug utilization in Marketplace plans (per Express Scripts) and new hepatitis C treatments.
  • After 2014, CMS forecasts that drug spending will be comparable with the overall growth in national health expenditures. CMS projects outpatient prescription drug spending will grow at a compound average rate of 5.7% from 2015 to 2023. During this period, Medicaid and Marketplace enrollment will slow. There will also be fewer generic launches and the launch of more expensive specialty drugs.
  • Consumers’ out-of-pocket expenses—cash-pay prescriptions plus copayments and coinsurance—were revised sharply upwards. Last year, CMS projected that out-of-pocket drug spending would be $41.1 billion in 2013, and decline to $38.0 billion in 2014. This year, CMS projects out-of-pocket drug spending to have been $46.8 billion in 2013, and to decline slightly to $46.3 billion in 2014. CMS attributes the change to payers and health plans shifting specialty drug costs to patient using 4- and 5-tier formularies, higher copayments, and more coinsurance. (In a future article, I’ll update our analysis of who will be paying for prescription drugs.)
CMS again emphatically rejected the notion that the (PPACA)Affordable Care Act has led to lower spending, noting:
“The recent period is marked by a four-year historically low rate of health spending growth, which was primarily attributable to the sluggish economic recovery and constrained state and local government budgets following the 2007–09 recession. In addition, increases in cost sharing for people with private health insurance and a few notable one-time factors, such as the effect of having several top-selling brand-name drugs lose patent protection, contributed to the slow overall spending growth.”
For more on the macroeconomy angle, see my summer 2013 data crush in A Very Cool Look at Healthcare Spending and the Economy.


Spending on outpatient prescription drugs remains a small part of overall U.S. healthcare expenditures. The chart below shows the three largest categories, which collectively accounted for about two-thirds of total U.S. spending in 2013.

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Throughout the next 10 years, more than half of the expenditures will come from the two largest categories—hospital care and professional services (from physicians, dentists, and other professionals). In 2013, these categories account for 58.6% of U.S. healthcare spending. In 2023, CMS projects that they will be essentially an unchanged share, at 58.3%. Annual U.S. expenditures on hospital care and professional services will grow to $3.0 trillion (+78%) by 2023.

Despite generating headlines, outpatient spending on prescription drugs accounted for only 9.4% of total U.S. spending in 2013. Drug spending is projected to remain at a roughly stable share over the next 10 year.

So, when will the congressional hearings on hospital pricing start? Yeah, I didn’t think so.

P.S. If you're brave and/or wide awake, click here to watch a 60 minute video of those wascally CMS economists describing the forecast.

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