The top line projections highlight the government’s official view that prescription drugs dispensed by retail and mail pharmacies will have a modest impact on U.S. healthcare costs.
However, there are some notable changes from the previous forecast. CMS now expects that the Inflation Reduction Act’s changes to the Medicare Part D program will have a greater impact than previously projected, while private insurers will find drug costs creeping higher.
Below, we outline the four major takeaways from the latest projections, which continue to show that taxpayers—primarily via Medicare and Medicaid—will continue to dominate the employer-sponsored insurance market. And like it or not, vertically integrated insurers, PBMs, specialty pharmacies, and providers will continue to prosper.
I ♥ DATA
The Office of the Actuary at CMS publishes projections for U.S. National Health Expenditures (NHE). These projections include spending on prescription drugs sold through outpatient retail, mail, and specialty pharmacies.
As always, I encourage you to review the source materials:
- National Health Expenditure Projections, 2024–33: Despite Insurance Coverage Declines, Health To Grow As Share Of GDP (Health Affairs article from CMS staff)
- National Health Expenditure Projections 2024–33 (Summary presentation deck from CMS)
- National Health Expenditures data files (Party time!)
MEET THE NEW BOSS
Outpatient prescription drug spending from retail and mail pharmacies is expected to grow slightly slower than overall healthcare spending. CMS projects that from 2023 to 2033, total health spending will grow at an average rate of 5.8% per year, while prescription drug spending is expected to grow slightly more slowly, at an average rate of 5.6% per year.
Consequently, outpatient prescription drug spending is projected to remain a small portion of overall U.S. healthcare expenditures. CMS projects that outpatient prescription drugs will account for 9.0% of 2033 national healthcare expenditures—compared with 9.2% in 2023. Prescription drugs have consistently been 9% to 10% of total U.S. spending since 2000.
The chart below presents DCI’s summary of the historical and projected payer mix for net prescription spending.
[Click to Enlarge]
Observations on the latest forecast:
- CMS now projects greater savings on prescription drugs from the Inflation Reduction Act. Medicare’s share of overall prescription spending increased from 2% in 2005 to 18% in 2006, when the Part D program launched. It has since grown to the 32% shown above. By 2033, CMS projects that Medicare’s share will increase slightly, to 33%.
Last year, CMS had projected that Medicare would be 39% of prescription spending by 2032. Spending in 2032 is now projected to be $10 billion lower than it was last year. CMS attributes the forecast decrease to “lower prices associated with negotiated savings on certain high-expenditure pharmaceuticals and the linking of drug price increases to the CPI.”
CMS continues to project that Medicare’s spending growth rate will fluctuate over its projection period. For 2024, CMS projects higher double-digit spending growth (14.7%), which it attributes partly to higher demand from the elimination of the 5% coinsurance component for catastrophic coverage.
Spending will decelerate sharply to 6.0% for 2025. CMS attributes the slowdown to greater savings from the new manufacturer discount program compared with coverage gap discounts. (A recent JAMA article estimates that manufacturers will owe higher discounts for about 90% of drugs.) Medicare spending will accelerate to 8.7% in 2027, before decelerating over the next six years to 3% or less for 2031 and beyond.
Of course, neither CMS nor the JAMA article accounted for the possibility that manufacturers may pop the gross-to-net bubble and scramble these forecasts.
Demographics will play an important role in Medicare’s future growth. Reality bites for Generation X in 2030. Consequently, annual growth in Medicare enrollment will slow to only 1.0% by 2033. Whatever, nevermind.
- Private insurance’s share of spending on prescription drugs will rebound slightly. Private health insurance for prescription drugs grew most quickly during the 1980s and 1990s, when most employers added pharmacy benefits. Its share peaked in 2001, at 50% of net prescription drug spending. Private insurance paid for only 39% of outpatient drug spending in 2023. As you can see above, CMS projects that private insurance's share of spending will increase slightly, to 41% of spending by 2033.
CMS has assumed that as the U.S. population ages, the employer-sponsored insurance market will continue to shrink as a share of total insurance enrollment. Total enrollment will increase over the next five years, from 175.6 million in 2023 to 177.0 million in 2028. However, CMS then projects that enrollment will decline, to 175.4 million in 2033.
Note CMS’s “private insurance” category also includes individually purchased private insurance. These policies include Medigap Medicare supplemental coverage and all individually purchased plans, including coverage purchased through the health insurance marketplaces. Since 2013, the greatest growth in this category has come from marketplace plans. Under current law at the time CMS developed its projections, these subsidies were scheduled to expire. The One Beautiful Bill Act (OBBA) did not extend these subsidies.
- Consumers’ share of outpatient drug spending will continue to decline, but remain disproportionately higher than that of other healthcare services. In 2023, consumers’ out-of-pocket prescription expenses—cash-pay prescriptions plus copayments and coinsurance—were $58.2 billion. That equated to 13% of net outpatient prescription drug expenditures.
As you can see from the chart above, consumers’ collective share of outpatient prescription drug expenditures has declined over time. Consumer expenses accounted for 79% of total U.S. outpatient prescription drug expenditures in 1973. CMS projects that consumers’ share will continue to decline, to 11% of net spending by 2033. That’s consistent with CMS’s previous forecasts.
The IRA will slow growth in out-of-pocket spending, from 2.5% in 2024 to 0.6% for 2025. For 2026 through 2033, growth will be in the low single digits. This forecast reflects the effects of the new Part D spending cap and, starting in 2026, the shift of formulary rebates to point-of-sale discounts for products with a maximum fair price (MFP).
Note that consumers will continue to shoulder a much higher portion of drug spending compared with their share of hospital spending. For 2033, CMS projects that consumers’ out-of-pocket spending for hospital care will be $57.8 billion—far below consumers’ projected $81.8 billion out-of-pocket spending for outpatient prescriptions in the same year. However, CMS projects that hospital spending will reach $2.7 trillion by 2033, while outpatient drug spending will hit $776 billion.
Put another way, patients’ out-of-pocket cost as a share of total spending will be 11% for outpatient prescription drugs, but only 2% for hospital care. Here’s a safe prediction: This huge discrepancy in exposure to costs will continue to influence our politicians.
- Prescription drugs will be a smaller share of Medicare spending, but a bigger share of private insurance spending. The chart below shows net outpatient drug spending as a share of U.S. national health expenditures for each of the three largest payer types tracked by CMS. The percentages differ among payers partly because the populations covered by different payers have different medical needs. In addition, rebate amounts differ.
[Click to Enlarge]
Prescription drugs’ share of Medicare spending increased from less than 2% in 2005 to nearly 10% in 2006, when the Part D program launched. It has since grown to the 14% shown above. By 2033, CMS projects that outpatient prescription drugs will decline to less than 12% of total Medicare spending.
At the same time, prescription drugs will become a slightly higher share of total healthcare spending for employer-sponsored insurance and individually purchased private insurance. (Reminder: These figures exclude nearly all provider-administered outpatient drugs.)
Consistent with previous analyses, CMS’s latest projections confirm that the government’s influence on the prescription drug market will continue to expand. However, CMS has lowered its projections slightly compared with previous years.
Including other state and federal programs, CMS projects that public funds will account for half of outpatient retail prescription spending from 2028 to 2030. Public payers’ collective share will peak in 2029, at 49.6% of spending. That’s slightly lower than its previous projection of 51.7% for 2029, reflecting the updated estimates of the IRA’s impact discussed above.
Don’t forget that federal and state government employees account for more than 10% of employer-sponsored insurance spending, so total taxpayer spending on healthcare is even higher than the CMS-reported figures.
I remain skeptical that that the U.S. will ever shift to a fully government-run healthcare system. Instead, most of the government’s spending will continue to flow through private companies, via Medicare Part D prescription drug plans, Medicare Advantage, managed Medicaid, and private insurance purchased on the public exchanges. For exaple, Morningstar recently projected that the top six insurers will continue to gain share of covered lives.
Consequently, vertical integration among insurers, PBMs, specialty pharmacies, and healthcare services will remain a defining feature of U.S. drug channels.
The good news?
You can look forward to many more updates to DCI’s infamous illustration of the major vertical business relationships among the largest companies.
NOTES FOR NERDS
- U.S. drug spending in the NHE is roughly equivalent to net revenues from retail, mail, long-term care, and specialty pharmacies after manufacturer rebates and discounts to third-party payers (including the government). It therefore differs from pharmacies’ prescription revenues, manufacturers’ revenues, and the “nondiscounted invoice price spending” data reported by IQVIA.
- The NHE’s outpatient drug spending does not measure total U.S. spending on prescription drugs. That’s because inpatient prescription drug spending within hospitals and spending on nearly all provider-administered outpatient drugs are reported within the hospital and professional services categories. CMS does not break out these figures, but Altarum estimates that provider-administered drugs account for additional drug expenditures of 4% to 5% of NHE. See Projections of the Non-Retail Prescription Drug Share of National Health Expenditures, Altarum, July 2022.
- The NHE’s Medicare figures combine Part D drug expenditures with a small amount of Part B spending in traditional Medicare fee-for-service programs. Its private health insurance figures include employer-sponsored insurance, Medicare supplemental coverage, and all individually purchased plans, including coverage purchased through the marketplaces.
- CMS does not provide projections for drug spending within the two major sub-categories of private health insurance. In DCI’s 2025 Economic Report on U.S. Pharmacies and Pharmacy Benefit Managers, we use NHE data to provide disaggregated drug spending estimates of employer-sponsored vs. individually purchased private insurance.
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