Notably, overall U.S. spending on drugs dispensed by retail and mail pharmacies will remain about 9% of overall healthcare spending.
However, the new forecasts reflect the reality that the Congressional Budget Office (CBO) finally acknowledged last week: The Inflation Reduction Act’s (IRA) Part D provisions will cost much more than CBO had initially estimated.
Below, we outline the factors that led to the dramatic revision to Medicare spending, along with insights on the shrinking role of private insurance and consumer out-of-pocket spending.
Taxpayers—primarily via Medicare and Medicaid—now account for a majority of U.S. prescription drug spending, outstripping the share financed via employer-sponsored insurance.
Like it or not, everyone in the drug channel should prepare to deal with the government programs as increasingly important transaction partners—along with the biggest vertically integrated insurers, PBMs, specialty pharmacies, and healthcare services that administer these programs.
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.
Here are links to the latest projections and the CMS analysis. As always, we encourage you to review the source materials:
- National Health Expenditure Projections, 2025–34: Strong Utilization Growth Initially, Legislative Impacts Later (Health Affairs article from CMS staff)
- National Health Expenditure Projections 2025–34 (Summary presentation deck from CMS)
- National Health Expenditures data files (Party time!)
For DCI’s review of the most recent historical data (from 2024), see Latest CMS Data Reveal Six Trends Reshaping U.S. Drug Spending.
MEDICARE TAKES THE WHEEL
Outpatient prescription drug spending from retail and mail pharmacies is expected to grow slightly more slowly than overall healthcare spending. Using the CMS annual projections for 2025 to 2034, we calculate a 5.1% compound annual growth rate (CAGR) for outpatient prescription drug spending versus a 5.2% CAGR for total national health expenditures.
Consequently, outpatient prescription drug spending is projected to remain a small and stable portion of overall U.S. healthcare expenditures. CMS projects that outpatient prescription drugs will account for 9.1% of 2034 national healthcare expenditures—compared with 9.2% in 2025. Prescription drugs have consistently been 9% to 10% of total U.S. healthcare 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:
1. CMS now projects substantially higher Medicare prescription drug spending.
Medicare’s prescription drug spending is projected to be $314.9 billion in 2033 and $324.3 billion in 2034. Last year, CMS had projected 2033 spending to be only $259.5 billion.
CMS now projects Medicare’s prescription spending to be $55 billion (+21%) higher in 2033 compared to last year’s projection.
The increase reflects multiple factors, some of which were among the significant forecast errors that CBO acknowledged in its July 29 memo. While CMS and CBO publish different measures, baselines, and forecast windows, many of the factors underlying CMS's higher Medicare spending projections overlap with the reasons CBO cited for revising its IRA estimates:
But CMS's revised projections are consistent with CBO's recent acknowledgment that the IRA's Medicare Part D provisions will cost substantially more than originally advertised—something that we've long argued here at Drug Channels.
CMS now projects Medicare’s prescription spending to be $55 billion (+21%) higher in 2033 compared to last year’s projection.
The increase reflects multiple factors, some of which were among the significant forecast errors that CBO acknowledged in its July 29 memo. While CMS and CBO publish different measures, baselines, and forecast windows, many of the factors underlying CMS's higher Medicare spending projections overlap with the reasons CBO cited for revising its IRA estimates:
- Negotiated prices have been higher (discounts have been smaller) than CBO had projected. For instance, CBO had estimated that net prices for selected drugs would decline by 50%. But the first set of drugs had net prices that were only 22% lower than their 2023 value. (As I’ve pointed out, even the 22% figure is an exaggeration.)
- Utilization of specialty drugs grew much more quickly than projected. This effect accelerated in 2025, with the introduction of an out-of-pocket spending cap. For 2025, specialty-drug utilization among non-low-income Part D beneficiaries increased by 45%, while utilization growth for traditional drugs was only 2%.
- Medicare spending on GLP-1 drugs has increased dramatically. Medicare beneficiaries’ use of GLP-1 drugs for such indications as type 2 diabetes or cardiovascular disease has grown substantially. The number of Part D enrollees filling a prescription for Ozempic grew by 929%, from about 142,000 people in 2019 to 1.5 million in 2023. The Better Approaches to Lifestyle and Nutrition for Comprehensive Health (BALANCE) Model will further accelerate this spending, although it did not factor into these CMS forecasts.
- Overall inflation was higher than CBO had expected. Higher inflation reduced projected manufacturer payments under the IRA's inflation rebate provisions.
- The IRA’s Part D redesign resulted in much higher plan bids. CBO attributed $550 billion of its $700 billion increase in projected Part D outlays to the 2026 Part D bids.
CBO didn’t disclose how it accounted for the unfunded “demonstration” funds that propped up the collapsing prescription drug plan (PDP) market. CMS will not continue the program for 2027.)
- CBO failed to consider IRA-influenced list price reductions. Lower list prices within the Net Pricing Drug Channel (NPDC) reduce manufacturer discount payments tied to list prices, thereby lowering government receipts from the Manufacturer Discount Program. (The discount program replaced the coverage gap discount program in 2025.)
But CMS's revised projections are consistent with CBO's recent acknowledgment that the IRA's Medicare Part D provisions will cost substantially more than originally advertised—something that we've long argued here at Drug Channels.
2. Prescription drugs will be a growing share of Medicare spending for the rest of this decade.
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 35% figure shown above for 2024. By 2034, CMS projects that Medicare’s share will plateau at about 40% of drug spending from 2028 through 2034.
Contrast that with last year’s forecast, which had Medicare peaking at 35% of spending in 2029 and then declining to 33% by 2033 (the final year of last year’s forecast period).
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.
As you can see above, CMS expects outpatient prescription drugs’ share of total Medicare spending to rise, from roughly 13% in the pre-2022 period to about 16% from 2026 through 2029.
Perhaps optimistically, CMS expects growth in Medicare’s drug spending to start decelerating later in the decade due to moderating growth in use of diabetes and obesity drugs, adaptation to the IRA’s Part D benefit structure, and the impact of price negotiations.
Contrast that with last year’s forecast, which had Medicare peaking at 35% of spending in 2029 and then declining to 33% by 2033 (the final year of last year’s forecast period).
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]
As you can see above, CMS expects outpatient prescription drugs’ share of total Medicare spending to rise, from roughly 13% in the pre-2022 period to about 16% from 2026 through 2029.
Perhaps optimistically, CMS expects growth in Medicare’s drug spending to start decelerating later in the decade due to moderating growth in use of diabetes and obesity drugs, adaptation to the IRA’s Part D benefit structure, and the impact of price negotiations.
3. Private insurance will shrink as a share of drug spending.
CMS estimates that private insurance accounted for about 37% of spending in 2024. That share is projected to decline slightly over the next ten years. About 11% of private insurance spending went to outpatient prescriptions.
CMS assumes that as the U.S. population ages, enrollment in employer-sponsored insurance will remain essentially flat, from 178.6 million people in 2024 to 178.5 million people in 2034. Over the same period, the U.S. population is projected to grow by about 11 million people. Virtually all of this growth will come from people age 65 or older, who will account for more than one in five Americans by 2034. As a result, Medicare enrollment is projected to increase from 66.6 million to 78.1 million.
Note that CMS’ “private insurance” category also includes individually purchased private insurance such as Medigap Medicare supplemental coverage and coverage purchased through the health insurance marketplaces. CMS projects direct-purchase enrollment to have peaked in 2025, decline after the expiration of the American Rescue Plan Act of 2021 (ARPA) subsidies, and then recover modestly from 2030 onwards.
Private insurance spending will be $41 billion lower (–13%) than last year’s forecast, although CMS doesn’t provide details behind this change.
CMS assumes that as the U.S. population ages, enrollment in employer-sponsored insurance will remain essentially flat, from 178.6 million people in 2024 to 178.5 million people in 2034. Over the same period, the U.S. population is projected to grow by about 11 million people. Virtually all of this growth will come from people age 65 or older, who will account for more than one in five Americans by 2034. As a result, Medicare enrollment is projected to increase from 66.6 million to 78.1 million.
Note that CMS’ “private insurance” category also includes individually purchased private insurance such as Medigap Medicare supplemental coverage and coverage purchased through the health insurance marketplaces. CMS projects direct-purchase enrollment to have peaked in 2025, decline after the expiration of the American Rescue Plan Act of 2021 (ARPA) subsidies, and then recover modestly from 2030 onwards.
Private insurance spending will be $41 billion lower (–13%) than last year’s forecast, although CMS doesn’t provide details behind this change.
4. Consumers’ share of outpatient drug spending will continue to decline, but remain disproportionately higher than that of other healthcare services.
In 2024, consumers’ out-of-pocket prescription expenses—cash-pay prescriptions plus copayments and coinsurance—were $60.0 billion. That equated to 12% 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 77% of total U.S. outpatient prescription drug expenditures in 1974. CMS projects that consumers’ share will continue to decline, to 10% of net spending by 2034. That’s consistent with CMS’s previous forecasts.
While out-of-pocket expenses dropped by 0.9% in 2024, CMS projects that they grew by 5% in 2025. CMS attributes this growth to GLP-1 prescriptions with large copayments or direct cash-pay purchases.
CMS projects that the IRA will help keep annual growth in out-of-pocket spending below 4% after 2025. However, the effects on individual beneficiaries will vary.
Consumers will continue to shoulder a much higher portion of drug spending compared with their share of hospital spending. For 2034, total U.S. spending on hospital care is projected to be $1.9 trillion higher than outpatient prescription drug spending. However, consumers’ projected out-of-pocket spending for hospital care ($62.7 billion) will be $17.7 billion lower than their out-of-pocket spending for outpatient prescriptions ($80.5 billion). Consequently, consumers’ out-of-pocket expenses will account for 9.9% of net drug spending, but only 2.3% of hospital spending. This benefit design discrepancy partly explains why consumers are more critical of prescription drug spending than they are of hospital spending.
As you can see from the chart above, consumers’ collective share of outpatient prescription drug expenditures has declined over time. Consumer expenses accounted for 77% of total U.S. outpatient prescription drug expenditures in 1974. CMS projects that consumers’ share will continue to decline, to 10% of net spending by 2034. That’s consistent with CMS’s previous forecasts.
While out-of-pocket expenses dropped by 0.9% in 2024, CMS projects that they grew by 5% in 2025. CMS attributes this growth to GLP-1 prescriptions with large copayments or direct cash-pay purchases.
CMS projects that the IRA will help keep annual growth in out-of-pocket spending below 4% after 2025. However, the effects on individual beneficiaries will vary.
- In the absence of the IRA, one published simulation estimated that about 6.1 million non-LIS beneficiaries would have reached the $2,000 catastrophic threshold based on total drug spending. Among affected beneficiaries, estimated savings averaged about $1,100, but the study also found substantial variation and noted that many high-spending beneficiaries previously had supplemental protection.
- Part D plans have responded to the IRA’s new benefit design by increasing cost-sharing with greater use of coinsurance instead of copayments, increasing or adding deductibles, and higher premiums. Consequently, beneficiaries whose spending does not reach the cap may have higher spending.
Consumers will continue to shoulder a much higher portion of drug spending compared with their share of hospital spending. For 2034, total U.S. spending on hospital care is projected to be $1.9 trillion higher than outpatient prescription drug spending. However, consumers’ projected out-of-pocket spending for hospital care ($62.7 billion) will be $17.7 billion lower than their out-of-pocket spending for outpatient prescriptions ($80.5 billion). Consequently, consumers’ out-of-pocket expenses will account for 9.9% of net drug spending, but only 2.3% of hospital spending. This benefit design discrepancy partly explains why consumers are more critical of prescription drug spending than they are of hospital spending.
MEET THE OLD BOSS
As you can see in the first chart above, public funds—Medicare, Medicaid, and other public payers—accounted for more than half of outpatient prescription drug spending in 2024. That share will continue to grow, due largely to higher Medicare spending for an aging population.
Don't forget that federal, state, and local governments finance employer-sponsored health coverage for millions of workers and their dependents. Consequently, taxpayer financing of healthcare extends well beyond the public insurance programs shown in the CMS data.
For 2026, four companies—Centene, CVS Health, Humana, and UnitedHealth Group—account for 80% of prescription drug plan (PDP) enrollment and 58% of Medicare Advantage (MA-PD) plan enrollment. (source)
These companies are among the nation's largest vertically integrated healthcare organizations and serve as key private-sector partners in administering Medicare benefits. As Medicare's role in prescription drug spending expands, these organizations are likely to become even more influential in U.S. drug channels. ICYMI, you can find our most recent illustration here: Mapping the Vertical Integration of Insurers, PBMs, GPOs, Specialty Pharmacies, and Healthcare Services: DCI’s 2026 Update.
Expect continued government intervention in the drug market—with growing risks for pricing, access, and U.S. biomedical innovation.
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 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 has estimated that provider-administered drugs account for additional 4% to 5%of NHE drug spending.
- 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 private insurance 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 2026 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.
- Note that the CMS data were substantially revised in 2024, so the data above may differ from figures published before the comprehensive revision. See Summary of the 2024 Comprehensive Revision to the National Health Expenditure Accounts.
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