What’s Behind Medicare and Medicaid Drug Spending Growth?

Let’s dip back into the just-released 2013 National Health Expenditure data, which the Centers for Medicare & Medicaid Services (CMS) recently released. In last week's Hospitals and Physicians Spending Outpace Drugs in Latest U.S. Healthcare Spending Data, I compare drug spending growth with spending growth of other healthcare services.

Today, I delve into drug spending trends by payer. As I describe below, policy and population changes led to significant drug spending growth by Medicare and Medicaid, while private health insurance and consumers paid less.

The 2013 numbers provide a peek at the forces that will change drug payment in the coming years. Don't say you weren't warned!

THE CHARTS

The chart below shows the payment sources for outpatient prescription drugs (share of dollars) in 2013, the most recent year for which data are available. Medicare and Medicaid—the two primary CMS programs—paid for 35% of total outpatient drug spending in 2013. The private health-insurance share peaked in 2001 at 51% and has been declining ever since—reaching 43.5% in 2013. (I describe the data sources in my previous post.)

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The next chart shows the year-over-year growth rates in expenditures, by payer. Note that these expenditure data are net of manufacturer rebates, so the reported growth rates differ from changes in pharmacies’ prescription revenues or manufacturers’ gross revenues.

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THE STORY

Here are four observations about the 2013 prescription drug spending growth patterns.

1. Medicare grew faster than did all other payers. The second chart shows a total 2013 Medicare prescription spending growth rate of 10.7%. Note that the Medicare data combine Part D drug expenditures (about 87% of Medicare drug expenditures) with such non-Part D drug expenditures as Medicare Advantage drugs and some Part B spending in traditional Medicare fee-for-service programs.

In 2013, more than 37 million Medicare beneficiaries were enrolled in a Part D plan: either a Prescription Drug Plan (PDP) or a Medicare Advantage prescription drug plans. In 2013, enrollment grew by 2 million beneficiaries (+5.5%). Medicare enrollment growth is being partially driven by the Affordable Care Act (ACA), which shifted the employer-sponsored retiree drug subsidy from a tax-free to a taxable benefit. As a result, many retiree health plans stopped providing drug coverage and shifted beneficiaries to Part D plans. Between 2011 and 2014, total enrollment in employer-only Part D plans more than doubled, from 2.9 million to 6.5 million beneficiaries.

The ACA also increases subsidies for Part D enrollees who reach the catastrophic benefit phase (a.k.a., “donut hole”), which contributed to Medicare’s growth rate. Starting in 2011, the ACA requires manufacturers of drugs covered by Medicare Part D to participate in the Medicare coverage gap discount program. It provides 50% discounts on brand-name drugs to enrollees who reach the coverage gap. During 2013, the 4.3 million seniors and people with disabilities saved $3.9 billion, or an average of $911 per beneficiary.

CMS notes that the Medicare growth occurred despite the March 2013 budget sequestration, which included an across-the-board 2% reduction in spending on Medicare benefits in 2013. During that year, total Medicare spending growth was only 3.4%, or one-third of the Medicare drug spending growth rate.

2. Medicaid spending increased for the first time since 2009. In 2013, Medicaid spending grew by 4.7%, reversing recent trends. In 2011 and 2012, healthcare reform reduced Medicaid spending, which declined by 0.2% in 2011, and grew by only 1.1% in 2012. The ACA increased the Medicaid unit rebate amount and extended rebates to Medicaid managed care plans. Federal expenditures on Medicaid shrank by 12.0% in 2011 and 8.0% in 2012.

In 2013, Federal expenditures grew by 5.7%, as utilization increased and the rebates became part of baseline spending. In contrast, state and local expenditures on Medicaid slowed in 2013. In 2011 and 2012, they had grown by 24.4% and 14.6%, respectively. The divergence stems from changes in the Federal Medical Assistance Percentage (FMAP) formula, which allocates Medicaid spending between the states and the federal government.

3. Private health insurance dropped. Private health insurance expenditures declined by 0.5%. CMS attributed the overall slow growth in private health insurance benefit to enrollment in high-deductible health plans, which tend to depress consumers’ use of healthcare services. For more on changes in pharmacy benefit design, see How Employers Are Managing Pharmacy Benefits in 2014.

Note that CMS does not distinguish between employer-sponsored private insurance and individually purchased plans, including coverage purchased through the state-level Health Insurance Marketplaces (HIM). The HIM plans will be a significant factor in the 2014 data, but they had little impact in 2013.

4. Consumers paid less. In 2013, consumers’ out-of-pocket expenses—cash-pay prescriptions plus copayments and coinsurance—dropped by $558 million, from $46.5 billion in 2012 to $45.9 billion in 2013. The consumer’s share is predicted to keep dropping, as I explain in Here’s Who Will Pay For Prescription Drugs in 2023.

WHAT HAPPENS NEXT?

In its Health Affairs article, the CMS economists gamely reiterates their belief that the slowdown in overall healthcare spending was due to economic conditions, not the Affordable Care Act. They note:

The recent similarity between national health care spending and GDP growth is consistent with historically observed patterns as the economy moves further from the end of the recession. The key question is whether health spending growth will accelerate once economic conditions improve significantly; historical evidence suggests that it will.

Health economic nerds, such as yours truly, are very familiar with this relationship. Check out my favorite chart from last year in A Very Cool Look at Healthcare Spending and the Economy.

However, the wonks wisely hedge their bets. Here is their article’s conclusion:

More notable provisions of the ACA, such as those related to the health insurance Marketplaces and the Medicaid expansion, will affect the future health care spending trend through the expansion of health insurance to people who were previously uninsured and the availability of plans with more comprehensive benefits for those who previously had coverage.

At the same time, there have been and will continue to be forces that keep medical price growth low, particularly for Medicare. In addition, shifts to private coverage with higher deductibles could continue to have an effect. The balance of these and many other factors over the next few years will determine how the historically low health spending growth from 2009 to 2013 is viewed: as the temporary aftermath of the great recession or the beginning of a new era.

While politics typically prevents an honest discussion of these tradeoffs, reality will render its own judgment over the next few years.