Latest CMS Data Reveal Six Trends Reshaping U.S. Drug Spending

By Adam J. Fein, Ph.D.

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

We spent an astounding $5,278,588,000,000 on healthcare in 2024. Yes, that’s $5.3 trillion!

Retail outpatient prescription drugs accounted for less than 9% of that total. More than half of net outpatient drug spending was paid by federal, state, and local government programs. Below, we delve into the spending trends, which reveal the impact of the Inflation Reduction Act (IRA) on Medicare spending, the boom in healthcare marketplaces, and the post-pandemic bust in Medicaid.

Contrary to what you might read, the government’s data show that drug spending growth was not driven by purportedly “skyrocketing” drug prices. In reality, nearly all of the increase in drug spending reflected higher utilization—more people treated, more prescriptions dispensed, and shifts among drugs dispensed—rather than higher net prices.

Prices may grab headlines, but utilization—and taxpayers—are driving the spending story. When prices stop being signals, markets stop being markets.

Four Unexpected Ways that the COVID-19 Medicaid Boom Will Affect PBM and Pharmacy Profits (rerun)

This week (Monday through Thursday), I’m rerunning some popular posts. Click here to see the original post and comments from April 2020.

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The U.S. economy is in a medically-induced coma. Unemployment is soaring. Companies are teetering on the brink of bankruptcy. It is unclear when our lives will return to their pre-pandemic state.

One thing seems apparent: As people lose jobs and health insurance, Medicaid enrollment will jump, perhaps by as much as 20% to 30%. This will have profound implications for the drug channel.

Today, I focus on how this increase will affect retail pharmacies and pharmacy benefit managers (PBMs). Below, I review Medicaid enrollment trends, how states manage prescriptions, and the factors driving the coming boom in Medicaid enrollment.

As I explain, many (but not all) retail pharmacies will benefit from Medicaid growth. PBMs, however, will not fare as well. Read on and see if you agree.

Four Unexpected Ways that the COVID-19 Medicaid Boom Will Affect PBM and Pharmacy Profits

The U.S. economy is in a medically-induced coma. Unemployment is soaring. Companies are teetering on the brink of bankruptcy. It is unclear when our lives will return to their pre-pandemic state.

One thing seems apparent: As people lose jobs and health insurance, Medicaid enrollment will jump, perhaps by as much as 20% to 30%. This will have profound implications for the drug channel.

Today, I focus on how this increase will affect retail pharmacies and pharmacy benefit managers (PBMs). Below, I review Medicaid enrollment trends, how states manage prescriptions, and the factors driving the coming boom in Medicaid enrollment.

As I explain, many (but not all) retail pharmacies will benefit from Medicaid growth. PBMs, however, will not fare as well. Read on and see if you agree.

A Post-Election Projection: The 2025 Payer Market for Prescription Drugs

In Latest CMS Forecast Shows Big Drug Spending Growth Through 2025, I examined the July 2016 drug spending forecasts from the Centers for Medicare & Medicaid Services (CMS).

Alas, last week’s election exploded these projections. Today, I analyze CMS’s official pre-election insights about payment for outpatient prescriptions drugs in 2025. I then speculate on how these figures might change under the new administration, which wants to repeal and replace the Affordable Care Act (ACA). Based on the most well-known Republican proposals, I project a rebound in the employer-sponsored market compared with the CMS baseline projections.

But never forget a truism of the projection business: A good forecaster is not necessarily smarter than everyone else—he merely has his ignorance better organized.

Five Fun Facts: The Newest Prescription Drug Spending and Payer Data

Last week, the econowonks at the Centers for Medicare & Medicaid Services (CMS) released the 2014 National Health Expenditure data, which are the definitive source for U.S. healthcare spending data. Savor the numbers in the Health Affairs article National Health Spending In 2014: Faster Growth Driven By Coverage Expansion And Prescription Drug Spending. (Free download)

In 2014, net spending on outpatient prescription drugs hit $297.7 billion. For the first time since 2009, drug spending growth exceeded national healthcare spending growth. Below, I delve into who paid for these prescription drugs. A big surprise: Public sources exceeded employer-sponsored private insurance for the first time since the 1960s.

On the plus side, due to data revisions, 2014 drug spending was $7.4 billion less than CMS had projected back in July.

Read on for my detailed look at trends in who really pays for our country's prescriptions drugs.

News Roundup, November 2014: Salix, Merck, Co-Pay Cards, Part D Preferred Networks, and an Insurance Cartoon

Here's a pre-Thanksgiving news roundup, to stretch your mind before stretching your stomach next week. In this issue:

• Stuffing—Salix Pharmaceuticals reminds investors why wholesaler agreements matter

• Pumpkin Pie (in the Face)—How Merck beat co-pay card litigation

• Gobble, Gobble—An important update on retail chains’ participation in Part D plans’ preferred networks

Plus, I share a surprisingly useful cartoon that explains the U.S. health insurance system. Next week, show it to your family, so they understand more about your job and the world around us. Happy Thanksgiving!

Here’s Who Will Pay For Prescription Drugs in 2023

In CMS Forecast: Big Drug Spending Growth, But Hospitals and Doctors Will Still Capture Most Healthcare Spending, I examined the September 2014 drug spending forecasts from the Centers for Medicare and Medicaid Services (CMS).

After crunching the numbers again, I identified new insights into the 2023 drug market. As the charts below show, CMS expects that the employer-sponsored insurance market will shrink more than it had previously projected, while Medicare and Medicaid will grow even faster. CMS is still projecting that individually-purchased private insurance (via both public and private exchanges) will account for a small share of drug spending.

Is your organization prepared for the government’s unprecedented growth?

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.

Drug Channels News Roundup: March 2014

Get ready for spring by staying inside and reading our latest selection of noteworthy Drug Channels news stories.

In this issue:

• Bigger—AmerisourceBergen joins the fun in Brazil

• Badder—Good video on drug costs at hospitals vs. cancer clinics

• Madder—Oncologists dislike becoming hospital employees

• Sadder?—States are trying to eliminate specialty drug tiers

Plus, The Onion helps you fill out the rest of your 2014 NCAA Tournament bracket. Win a billion dollars yet?

P.S. Birds aren’t the only things that are tweeting. Follow @Drug Channels for regular updates on news stories that catch our eye.

Drug Channels News Roundup: October 2013

Boo! Time for my Halloween-themed roundup of Drug Channels news stories. Never fear. None are as scary as your teenage daughter's Miley Cyrus costume. (Trust me.)

In this issue:

• Zombie Attack: Why Fortune got its Express Scripts "exposé" wrong

• Don’t Fear the Reaper: Walmart lobbies for preferred networks…in Medicaid!

• 340Boo: A superb article on the 340B drug discount program

• Spooky: 10 megatrends for specialty pharmacy

Plus, Secretary of Health and Human Services Kathleen Sebelius provides tips for coping with the healthcare.gov website.

Five Crucial Questions about Healthcare Reform and Drug Channels

Yesterday, I looked at who will pay for our prescriptions drugs in 2022, using drug spending forecasts from the Centers for Medicare and Medicaid Services (CMS). See Public Funds and Exchanges Will Crowd Out Employer-Sponsored Insurance.

As a follow-up, I consider five questions about healthcare reform that could radically alter CMS’s forecasts and disrupt the channel:

• Will private exchanges take off?
• Will employer-sponsored insurance collapse?
• Will copay cards be banned on the public exchanges?
• Will narrow pharmacy networks dominate public exchanges?
• What happens to Pharmacy Benefit Manager (PBM) profits?

It’s not too soon for pharmaceutical manufacturers to consider how market access strategies could change as traditional employer-sponsored private insurance declines. Expect more pressure on the PBM business model, as drug payment shifts to (government-directed) health plans at the expense of self-insured employers.

Public Funds and Exchanges Will Soon Overtake Employer-Sponsored Insurance

The state-level Health Insurance Marketplaces (HIM) launch today, so let’s look at who will be paying for our drugs as healthcare reform kicks in.

In The Outlook for Pharmaceutical Spending Through 2022, I examine the September 2013 drug spending forecasts from the Centers for Medicare and Medicaid Services (CMS). I crunched the numbers again and identified four key insights into the 2022 drug market:

• Public funds, primarily Medicare and Medicaid, will pay for 42% of all drug spending.

• Individually-purchased private insurance (via both public and private exchanges) will account for 5% of drug spending.

• The employer-sponsored insurance market will keep shrinking.

• Consumer out-of-pocket spending will drop to only 10% of drug spending.

The CMS projections are highly precise econometric guesswork. (Hello, dartboard!) Tomorrow, I’ll consider some uncertainties behind these forecasts.

The Outlook for Pharmaceutical Spending Through 2022

The Centers for Medicare and Medicaid Services (CMS) has once again graced us with its forecasts for national health expenditures. The forecast is summarized in a Health Affairs article: National Health Expenditure Projections, 2012–22: Slow Growth Until Coverage Expands And Economy Improves (free download).

Below, I delve into the prescription drug forecasts and show you some pretty charts. Highlights:

• Prescription drug spending growth, which was negative in 2012, is projected to accelerate to 5.2% in 2014.

• From 2012 to 2022, annual expenditures will grow by $194.2 billion (+75%), to $455.0 billion. During this period, Outpatient prescription drugs will be at about 9% of total U.S. healthcare spending.

• Health care reform will add an extra $15.3 billion in annual drug spending by 2022. This is far below last year’s projected incremental $25.9 billion in spending by 2021.

In a future article, I’ll look at who will be paying for all of these drugs. In the meantime, pity the poor government economists tasked with forecasting healthcare spending. They must bravely peer beyond today’s pitched political battles and economic uncertainty—and then hurl a guess at the 2022 dartboard. Chin up, chaps!

Drug Channels News Roundup: July 2013

Ah, summer! Stay cool with these stories from the wonderful world of Drug Channels. In this issue:

• Top Dollar—Why Humira will be bigger than Lipitor
• Top Jobs—Pharmacists win again
• Top Sleazeball—No jail time for Avastin counterfeit wholesaler?!?

Plus, a cute, yet highly misleading, cartoon explaining healthcare reform. Top spin?

Prescription Drugs in CMS' New Essential Health Benefits Proposed Rule

While you were brining your turkey last week, the Center for Medicare and Medicaid Services (CMS) published a flock of proposed rules for implementing the Patient Protection and Affordable Care Act (PPACA), including new proposed rules for Essential Health Benefits (EHB): Patient Protection and Affordable Care Act; Standards Related to Essential Health Benefits, Actuarial Value, and Accreditation. It’s a sprightly 119 pages.

In this article, I look at the proposed EHB regulations for prescription drugs. These requirements will apply to plans within health insurance exchanges as well as non-grandfathered private health insurance options in the individual and small group markets. Here are a few highlights:

• States have some flexibility in defining the “typical employer plan” chosen as the EHB benchmark for pharmacy benefit design.
• Unlike Medicare Part D, there will be no protected drug classes.
• Plans can cover as few as one drug per therapeutic category, but will probably end up covering more.

Compared with Medicare Part D, this proposal gives pharmacy benefit managers (PBMs) and health plans greater negotiating leverage over brand-name pharmaceutical manufacturers. Depending on each state’s benchmark plan, the downside could be a loss of patient and prescriber choice.

Read on for a brief review of EHB, the proposed rule, and a few discussion questions for the managed markets team at a pharmaceutical manufacturer.

Health Care Reform: Impact on Drug Channels, Post-SCOTUS

"It is not our job to protect the people from the consequences of their political choices."

Hey, did you hear about the Supreme Court’s decision on the Patient Protection and Affordable Care Act (ACA) Yeah, I thought so.

I won’t rehash the constitutional issues. As long-time readers know, I think the ACA is messy, inelegant legislation with enormous unintended consequences. Nonetheless, it’s the law of the land (for now), so let’s review what it means for drug channel participants.

• Pharmacy Benefit Managers (PBMs) will gain from the expanded coverage and the launch of biosmiliars. The “transparency” requirements should not be material.
• Retail pharmacies will benefit from increased prescription volume and various legislative “fixes,” but face margin risk as the uninsured get the advantage of third-party bargaining power.
• Drug wholesalers will benefit from increased volume, although pharmacies’ generic margin pressure will flow up the channel.
• For pharmaceutical manufacturers, the gains from increased prescription volume and expanded coverage are offset by new fees and higher rebates. The impact of biosimilars depends on whether your company is facing biosimilar competition, or planning to become a biosimilar competitor.

Read on for details. And whether we like it or not, the Centers for Medicare and Medicaid Services (CMS) has almost unlimited power to reshape our healthcare system via regulation. Be afraid. Be very afraid.

Who Will Pay for Prescription Drugs in 2021?

In The Outlook for Drug Spending (With or Without ACA), I examine the latest drug spending forecasts from the Centers for Medicare and Medicaid Services (CMS). Today, I look at who will be paying for all of these drugs.

Here are four key insights about the 2021 drug market, assuming that the Patient Protection and Affordable Care Act (ACA) remains in place:

• Public funds, primarily Medicare and Medicaid, will pay for 44% of all drug spending.
• Insurance purchased via exchanges will be 5% of drug spending.
• The employer-sponsored insurance market will keep shrinking.
• Out-of-pocket spending by consumers will account for an even-smaller part of drug spending.

Read on for a look at the past, present, and future of payers. Pharmaceutical manufacturers need to consider how contracting will change as traditional private insurance declines. Meanwhile, PBMs will be gearing up as more people get coverage, although the business will shift to health plans at the expense of self-insured employers.

The Outlook for Drug Spending (With or Without ACA)

Soon, we'll all learn the Supreme Court’s decision about the Patient Protection and Affordable Care Act (ACA). On a bed of nails, they make us wait.

To pass the time, let’s look at the brand-new forecasts for health care spending from the Centers for Medicare and Medicaid Services (CMS). The complete forecast is summarized in the latest Health Affairs: National Health Expenditure Projections: Modest Annual Growth Until Coverage Expands And Economic Growth Accelerates (free download).

My number crunchification uncovered the following data points about drug spending:

• By 2021, annual prescription drug spending will nearly double, to $483.2 billion.

• In 2021, prescription drugs will account for 10.1% of total U.S. health care spending, vs. 10.0% today.

• Health care reform will add an extra $25.9 billion in annual drug spending by 2021.

CMS has reduced its growth forecasts substantially due to ongoing economic weakness. Read on for the factors behind the new forecast, both with or without ACA.

Will Exchanges Crowd Out Employer Coverage?

An intriguing new analysis by McKinsey & Co projects a much bigger shift away from employer-sponsored insurance (ESI) under healthcare reform than the Congressional Budget Office (CBO) projected last year. Read it here: How US health care reform will affect employee benefits.

The article is worthwhile reading for anyone trying to understand the future of managed markets contracting and payer marketing.

Their headline projection—30 percent of employers will definitely or probably stop offering ESI after 2014—implies a massive shift from today’s world of managed markets. Not only will the uninsured gain coverage, but McKinsey projects that the individual insurance market will explode via the highly-regulated exchanges created by the PPACA.

How will exchanges contract with pharmaceutical manufacturers? Will plans offered on the exchanges contract more like Medicare Part D Prescription Drug Plans (PDPs), like commercial plans, or be something totally different? No one knows yet, so I’ll just highlight a few insights and guesses for now.