Tuesday, April 07, 2020

The Latest CMS Outlook for Drug Spending—And How COVID-19 Will Change It

ICYMI, the boffins at the Centers for Medicare & Medicaid Services (CMS) recently released their new projections for U.S. National Health Expenditures (NHE). Unfortunately, the coronavirus almost immediately made these predictions obsolete.

It’s still useful to analyze these forecasts for a pre-pandemic examination of U.S. healthcare spending. A few highlights of the 2024 outlook:
  • Total U.S. spending on healthcare was projected to grow, from $3.6 trillion in 2018 to $5.0 trillion in 2024.
  • Spending on hospitals and professional services was expected to grow by a combined $800 billion—more than 60% of CMS’s projected $1.4 trillion increase in U.S. healthcare spending. That’s consistent with historical trends.
  • Net spending on outpatient prescription drugs in 2024 was projected to shrink to less than 9% of total U.S. spending. That would be its lowest level since 2000.
As usual, the actual facts run counter to the popular narrative that drug spending is skyrocketing relative to any other aspect of U.S. healthcare. Of course, the coronavirus will alter these projections. Below, I speculate how COVID-19 and its aftermath will affect healthcare and prescription drug spending.

Prediction is very difficult, especially if it's about the future. Feel free to add your own outlook in the comment section below.


As always, I encourage you to review the source materials for yourself:
For important details about these data, see the Notes for Nerds section below.

The most recent historical data are from 2018. I analyzed these figures in Latest CMS Data: Drug Spending is Not Skyrocketing; Hospitals and Physicians Dominate Healthcare Costs.

CMS provides projections through 2028. In this article, I focus on projections through 2024, which I consider to be a reasonable planning horizon for most Drug Channels readers.


The chart below presents the recent CMS forecasts for annual growth in total national healthcare expenditures and net spending on outpatient prescription drugs.

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Three highlights on these data:
  • Outpatient prescription drug spending is expected to grow more slowly than overall healthcare spending. CMS projects that from 2019 to 2024, total health spending will grow at an average rate of 5.3%, while prescription drug spending will grow more slowly, at an average rate of 4.8%.
  • Outpatient prescription drug spending will decline as a portion of overall U.S. healthcare expenditures. CMS projects that outpatient prescription drugs will account for 8.9% of 2024 national healthcare expenditures, compared with 9.2% in 2018.

    Note that CMS has significantly reduced its previously reported private health insurance drug spending figures for 2007 through 2017. (See “Notes for Nerds” in my analysis of the 2018 spending data.) That’s why net outpatient prescription drug spending now accounts for a smaller share of total healthcare spending compared with the figures in previous CMS reports.
FWIW, CMS has consistently overestimated drug spending. Actual net outpatient prescription drug spending was $335.0 billion for 2018. That’s $59 billion less than its 2012 prediction and $50 billion less than its 2015 prediction. Whoops!


Total U.S. spending on healthcare is projected to grow by $1.4 trillion, from $3.6 trillion in 2018 to $5.0 trillion in 2024.

The chart below shows the projected total growth in spending for the four largest categories: hospital care, professional services (physicians, dentists, and other healthcare professionals), outpatient prescription drugs, and healthcare administration costs. These four categories account for more than three-quarters of total U.S. healthcare spending in both 2018 and 2024. They also account for 77% of the projected total $1.4 trillion increase in healthcare spending growth.

[Click to Enlarge] 

As you can see, spending on hospital care is projected to grow by $461.3 billion, while spending on professional services is projected to grow by $337.3 billion. That’s a combined $800 billion in extra spending.

Meanwhile, spending on outpatient prescription drugs is projected to grow by $110.1 billion—or roughly one-seventh as much as the two largest categories. Guess which category will get the most attention from politicians?

For fun, I also highlight that spending on government and private insurance administration is projected to grow by $109.7 billion, from $306.0 billion in 2018 to $415.7 billion in 2024.


The coronavirus is upending our healthcare system and putting enormous pressure on hospitals. Despite increased costs of treatment, I expect that spending will be lower than the CMS projections.

Here’s why:
  • Hospital spending. Right now, hospital revenues are cratering. Elective medical procedures have been cancelled, physician office visits have shrunk, clinical lab revenues are down, ambulatory surgery centers are limited to medically necessary procedures, and outpatient services have been curtailed. How long will it take for demand to rebound?

    The CARES Act includes multiple provisions that will increase hospital spending, including the temporary suspension of Medicare sequestration in 2020 and a $100 billion grant to hospitals. However, I'm not confident that higher spending on COVID-19 treatment will offset the overall downturn in spending on the services and procedures that are being displaced.
  • Prescription drugs. Ultimately, I expect drug spending to be lower than the CMS forecasts.

    Fewer new drugs will be launched. Treatment and research for the coronavirus is crowding out basic research and clinical trials on new drugs for cancer, heart disease, etc. Clinical trials are being delayed or postponed, which will slow the submission of new drug applications. Some novel drugs will be delayed or never developed. The FDA will reduce its recent pace of new drug approvals, as our industry survey panelists expect.

    Spending on existing and soon-to-launch drugs will also likely be lower. Fewer physician office visits translate into physicians writing fewer new prescriptions and making fewer therapeutic switches. Virtual sales reps will not be as effective as in-person physician detailing. Social distancing will hurt prescriptions of promotion-sensitive products. It will be challenging to launch new drugs in 2020.

    Of course, we all hope that treatments and vaccines for COVID-19 will sharply increase drug spending as soon as possible.
If you live by the crystal ball, then you must be prepared to eat broken glass. Stay tuned.

  • U.S. drug spending in the NHE is roughly equivalent to total retail, mail, long-term care, and specialty pharmacies’ prescription revenues minus manufacturer rebates to third-party payers. It therefore differs from pharmacies’ prescription revenues, manufacturers’ revenues, and the “invoice price spending” data reported by IQVIA.
  • We define “Professional Care” to include these NHE categories: Physician and Clinical Services, Dental Services, and Other Professional Services.
  • The NHE data do not measure total U.S. spending on prescription drugs. Inpatient prescription drug spending within hospitals and nearly all provider-administered outpatient drugs are reported in other categories. This spending accounts for an estimated additional 4% to 5% of national expenditures.
  • Note that CMS substantially lowered the NHE drug spending figures from 2007 through 2017. CMS attributed the revisions to new data for computing the value of rebates in private health insurance. For example, net spending on prescription drugs by private health insurance for 2016 is now reported to have been $10.8 billion lower (-7%) than the previously reported figure.
For more on payment and spending for pharmaceuticals, see Chapter 4 of our new 2020 Economic Report on U.S. Pharmacies and Pharmacy Benefit Managers.

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