Wednesday, January 20, 2021

Latest CMS Data Reveal the Truth About U.S. Drug Spending

ICYMI: The econowonks at the Centers for Medicare & Medicaid Services (CMS) recently dropped the latest National Health Expenditure (NHE) data, which measures all U.S. spending on healthcare. Links below.

Today, I highlight the surprising insights from the latest figures. I examine the growth rates of major spending categories, break down costs vs. utilization, and highlight the unfavorable out-of-pocket dynamics for prescription drugs compared with hospital care.

Bonus: I also debrief you on CMS’s quinquennial comprehensive revision to the national spending data.

Regular readers know the unofficial motto of Drug Channels: "Everyone is entitled to their own opinion, but not their own facts." For 2021, I hope the drug pricing flat earthers (#DPFE) finally start to follow the data and acknowledge what’s really going on.


As always, I encourage you to review the CMS source materials: For crucial context about these data, see the Notes for Nerds section, below. As I explain there, CMS has also significantly restated its historical drug spending figures, which means they differ slightly from our previous analyses.


As measured in the National Health Expenditures (NHE) accounts, total U.S. spending on healthcare was an astounding $3,795,384,000,000 ($3.8 trillion) in 2019, up 4.6% from the 2018 figure.

In keeping with previous years’ figures, spending on hospital care and professional healthcare services was more than six times higher than spending on outpatient prescription drugs:
  • More than $2.2 trillion (58%) in total 2019 healthcare expenditures came from hospital care and professional services (physicians, dentists, and other healthcare professionals). These categories’ shares have been consistent for many years.
  • In 2019, U.S. net spending on outpatient prescription drugs was $370 billion. For 2019, outpatient prescription drugs accounted for only 9.7% of U.S. healthcare spending, having fallen from a 10.2% share in 2015. Note that these drug spending data are roughly comparable to net, post-rebate spending on patient-administered drugs paid under the pharmacy benefit. (See Notes for Nerds, below.)
We can also understand the relative size of the three major spending categories by examining year-over-year growth in spending. 

From 2018 to 2019, the U.S. spent $69.5 billion (+6.2%) more on hospital services and $46.4 billion (+4.7%) more on professional services. Meanwhile, spending on outpatient prescription drugs grew by $19.9 billion (+5.7%).

[Click to Enlarge]

As I have noted in my previous analyses, hospitals and physicians often try to delegitimize the NHE as a measure of drug spending—so they can blame drugmakers for high healthcare spending. Demonizing pharmaceuticals as the prime driver of U.S. healthcare spending growth is simply not accurate.


For 7 of the 9 years from 2010 to 2018, drug spending grew more slowly than did the other major spending categories. For 2019, however, drug spending grew more quickly than did spending on hospital care—but perhaps not for the reasons that you expect.

In the Health Affairs linked above, CMS provided data on the two primary components behind changes in spending:
  • Changes in utilization (which CMS calls “nonprice factors, such as the use and intensity of services”)
  • Change in prices
The chart below deconstructs the total change in spending into its component parts. 
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As you can see, more than 100% of drug spending growth resulted from growth in the number of people being treated and the number of prescriptions being dispensed. Utilization growth can be considered a positive trend, because it is well established that pharmaceutical spending reduces medical spending and improves patients’ health.

Utilization growth was offset by an average -0.4% decline in prices. The aggregate price declines came from higher generic substitution rates and deflating brand-name drug prices, per Surprise! Brand-Name Drug Prices Fell (Again) in 2020.

These figures are also comparable to the cost vs. utilization figures from my analysis of PBM drug trend reports. See PBMs and Drug Spending in 2019: CVS Health and Express Scripts Outperform Prime Therapeutics.


Most American patients don’t care about wonky policy terms like “health expenditures” and “net drug price.” Patients care about their out-of-pocket spending.

In 2019, consumers’ out-of-pocket expenses—cash-pay prescriptions plus copayments and coinsurance—accounted for 14.5% of net drug spending. Per my commentary in Drug Pricing Policy in 2021: Four Crucial Consequences of Pharmacy Benefits Today, some patients end up paying a much greater share of costs due to pharmacy benefit designs.

Another unusual aspect of U.S. healthcare is the relative share of costs that patients bear for different services. For 2019:
  • Total U.S. spending on hospital care was more than $822 billion higher than prescription drug spending.
  • However, consumers’ out-of-pocket spending for hospital care was more than $18 billion lower than consumers’ out-of-pocket spending for outpatient prescriptions.
[Click to Enlarge]

This unfortunate benefit design discrepancy partly explains why consumers are so much more unhappy about prescription drug spending than they are about hospital spending. It’s also another reason I consider copay accumulator adjustment to be so unfair to patients.

As the new administration takes over, let’s hope the latest NHE facts help balance the public discussion of U.S. healthcare spending. And the next time someone tells you that rising U.S. healthcare costs are due to "skyrocketing drug prices," ask them if they also belong to this organization.

  • 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 within the hospital and professional services categories. Altarum estimates that these other sources account for estimated additional drug expenditures of 4% to 5% of NHE. (source)
  • For 2019, the Centers for Medicare & Medicaid Services’ Office of the Actuary (OACT) implemented a comprehensive revision of the U.S. National Health Expenditure accounts. There were three improvements related to prescription drugs:
    • More accurate accounting for pharmacy rebates to plans. This change increased the reported spending figures.
    • Elimination of the double counting of spending at long-term care pharmacies. This change increased the reported spending figures.
    • Improved estimates of Medicare and Medicaid drug spending. This change reduced the reported spending figures for these programs.

    For more details, see Summary of the 2019 Comprehensive Revision to the National Health Expenditure Accounts. The next comprehensive benchmark revision will occur in 2025.

    The drug spending data revisions affected figures from as far back as 1978. There were some significant changes, particularly for recent years. For instance, drug spending by private insurance in 2018 was revised upwards by $20.8 billion (+15.5%), while drug spending by Medicare and Medicaid was revised downward by -$10.0 billion (-9.4%) and -$2.9 billion (-8.8%), respectively.

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