Healthcare Reform Hits U.S. Drug Spending in 2010

Good news, pharmaceutical economics nerds! The data gnomes at the Centers for Medicare and Medicaid Services (CMS) just released the 2010 National Health Expenditure data. Read all the juicy details in this Health Affairs article: Growth In US Health Spending Remained Slow In 2010; Health Share Of Gross Domestic Product Unchanged From 2009 (free download).

Total U.S. expenditures on retail prescription drugs were $259.1 billion, a historically low 1.2% annual increase vs. 2009. Prescription drug expenditures were the slowest growing part of the U.S. health care system, which grew by 3.9%. (See Exhibit 2 of the Health Affairs article.)

The Patient Protection and Affordable Care Act (PPACA) had an impact on the 2010 numbers, although the biggest effects are still to come. Three observations from my number-crunching:

• Consumer’s paid a record-low share of U.S. drug expenditures.
• CMS paid for almost one-third of drugs, another new record.
• Healthcare reform reduced Medicaid expenditures and shifted about $1 billion in Part D costs to the government. 

Read on for a detailed look at who paid for prescription drugs in 2010.

THE DATA

You can savor the latest expenditure data at CMS’ National Health Expenditure Historical Data page.

Expenditure (spending) data is not the same as pharmacy revenues, manufacturer sales, or provider purchases. NHE totals are net of manufacturer rebates, so the reported figures are lower than prescription revenues of retail and mail pharmacies. For a concise and only-mildy wonky explanation, see National Health Expenditures Accounts: Methodology Paper, 2010 (page 13).

NHE does NOT measure total U.S. spending on prescription drugs. Sales through outpatient retail channels are only about 75% of total pharmaceutical manufacturer sales. Unfortunately, there is no way to figure out spending for inpatient drugs in other NHE categories because spending is bundled with inpatient procedure fees. For example, some portion of "Hospital care" includes an unknown amount of drug spending.

CMS does report Medicare Part B outpatient spending, but only retrospectively and with a 2 to 3 year lag. See Exhibit 61 of The 2011-12 Economic Report on Retail and Specialty Pharmacies for Medicare Part B spending on office-administered drugs from 1997 to 2009. A portion of Part B spending is included in the Medicare data below.

WHO PAID FOR PRESCRIPTION DRUGS IN 2010?

The chart below shows the payment source for outpatient prescription drugs (share of dollars) in 2010. CMS programs—Medicare Part D, Medicaid, Children’s Health Insurance Program (CHIP)—grew faster than private and out-of-pocket payments. CMS paid for 31% of total retail drug spending in 2010. The private health-insurance share peaked in 2001 at 51% and has been declining ever since.

Here are the year-over-year growth rates in expenditures, by payer. In 2010, Medicare was the fastest-growing payer, by a wide margin.

SO, WHAT HAPPENED?

Here are the highlights of the 2010 data.

• Healthcare reform shifted Part D costs to the government. In 2010, nearly 4 million people with Medicare who reached the program’s Part D coverage gap received a one-time, tax-free $250 rebate check. (source) This resulted in a $1 billion increase in Medicare expenditures, which may have contributed to the declines in both out-of-pocket and private health insurance prescription drug spending. in contrast...

• Healthcare reform reduced Medicaid spending. Medicaid and CHIP grew by only 0.7% in 2010, compared with 6.8% in 2009. No surprise, since the PPACA increased the Medicaid unit rebate amount and extended rebates to Medicaid managed care plans. Thus, federal expenditures on Medicaid grew by 2.5% in 2010, while state and local expenditures on Medicaid shrunk by 2.5%. Drug manufacturers can also thank the pharmacy industry’s lobbying for a higher Average Manufacturer Price (AMP). If the new AMP-based FULs ever get implemented, expect another hit to Medicaid expenditures. (See The Pharmacy Reimbursement Hit from AMP-Based FULs.) In contrast...

• Medicare was the fastest-growing payer of drug expenditures. The NHE Medicare data combine Part D drug expenditures (88% of Medicare drug expenditures) with non-part D drug expenditures such as Medicare Advantage drugs and some Part B spending in traditional Medicare fee-for-service. The growth rate of Medicare Part D prescription drugs was 9.3% and growth rate for non-Part D Medicare prescription drugs was 7.0%. The chart above shows the total Medicare growth rate of 9.0%. Meanwhile...

• Consumers paid less. In 2010, consumers’ out-of-pocket expenses—cash-pay prescriptions plus copayments and coinsurance—shrank to an historical low 19% of total U.S. retail drug expenditures. Consumers’ expenses were $48.8 billion, down by $2.1 billion (-4.1%) from 2009. (Curiously, the 2010 figure is $5.5 billion lower than CMS’s July 2011 forecast for 2010 described in Who Will Pay for Prescription Drugs in 2020? Whoops!) Reasons for this decline include those Medicare rebate checks, reduced utilization, and generic substitution. 

LOOKING AHEAD

If fully enacted, the PPACA will boost drug spending. CMS projects that annual drug expenditures will double in the next 10 years, to $512.6 billion by 2020. And thanks to the PPACA, retail drug spending is projected to be $35.2 billion (+7.3%) higher in 2020 than it would have been without healthcare reform. (See CMS' Bright Future for Drug Spending in 2020.) PPACA will also increase pharmacy spending by shrinking the coverage gap (“donut hole”) for Medicare Part D patients.

Following the implementation of healthcare reform, private insurance is projected to pay for a greater share of retail prescription spending than will public funds. See Who Will Pay for Prescription Drugs in 2020? This apparent decrease in public funding is a bit misleading about the sources of payment because a large portion of “private” coverage will actually be paid for by the government through subsidies in Health Insurance Exchanges (HIE).

Of course, the Supreme Court may have some other ideas, but that‘s a topic for a future post!