2016 Drug Spending: The Shift from Employers to Government Payers—And Troubling Trends For Patients

In CMS Confirms It: Drug Spending Slows, Hospital and Physician Spending Grows, I showed that growth in drug spending was significantly below the growth rate of overall national healthcare spending. Today, I delve into trends in third-party and patient payment for prescription drugs.

In 2016, all payers experienced a slowdown in spending. Employers' drug spending growth was nearly flat, while consumers (on average) paid less out of pocket. And for the third year in a row, spending by government payers exceeded spending by employers. The NHE are net of rebates, so gross-to-net bubblenomics play a part in these figures.

I suspect that the very slow growth in employers’ net costs occurred partly because employees are being forced to pay debilitating coinsurance—in some cases with no limit on out-of-pocket drug expenses.

The NHE data therefore suggest a troubling gap between haves and have-nots, based on benefit design and diagnosis. Some people can make do with inexpensive generic drugs, while others end up with sky-high out-of-pocket costs.

Read on for our wonktastic deep dive into the 2016 spending data.

I ♥ DATA

As always, I encourage you to review the source materials:

• Health Affairs article: National Health Care Spending In 2016: Spending And Enrollment Growth Slow After Initial Coverage Expansions (Available for free to subscribers and to others for purchase.)

• National Health Expenditures data files (for fun!)

For important details about these data, see the Notes for Nerds section below.

WHO PAID FOR OUR DRUGS?

The chart below shows our analysis of payment sources for outpatient prescription drugs (share of dollars) in 2016, the most recent available data from the National Health Expenditures (NHE) accounts.

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In 2016, total net spending by all federal, state, and local programs accounted for 42.6% of total spending. Meanwhile, employer-sponsored private health insurance paid for only 40% of outpatient drugs, down from its peak of 49% in 2001. This was the third year that public sources exceeded employer-sponsored private insurance.

Per CMS Confirms It: Drug Spending Slows, Hospital and Physician Spending Grows, outpatient spending on prescription drugs in 2016 accounted for 9.8% of total U.S. spending. However, prescription drugs’ share of spending varied by payer type. The chart below shows net outpatient drug spending as a share of U.S. national health expenditures for each of the three largest payers.

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The percentages differ among payers partly because the populations covered by different payers have different medical needs. In addition, rebate amounts differ. Medicaid’s best price requirement means that it receives the deepest discounts.

The historical trends reflect changes in coverage. The Medicare Prescription Drug, Improvement, and Modernization Act (MMA) of 2003 created the Part D program, which launched in 2006. The MMA greatly increased Medicare’s spending on outpatient prescription drugs. Due to the Medicare Part D program, outpatient prescription drugs increased from 1.2% of Medicare’s total spending in 2005 to 14.2% in 2016. Drug spending for dual-eligible beneficiaries—those eligible for both Medicare Part D and Medicaid—was shifted to Medicare. That’s why Medicaid’s spending on drugs dropped as a share of its total program spending.

2016 TRENDS BY PAYER

The chart below shows the year-over-year growth rates in expenditures, by payer.

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These data reveal the following key drug spending growth patterns for 2016:

• 1. Spending by Medicare and Medicaid slowed. Medicare and Medicaid—the two primary CMS programs—paid for 39% of total outpatient drug spending and more than 90% of public spending. Medicare spending slowed, from 9.3% in 2015 to 2.8% in 2016. Growth in Medicaid prescription drug spending decelerated sharply, from a 24.6% increase in 2014 to a 13.4% increase in 2015 to a 5.5% increase in 2016. The 2014 and 2015 growth in Medicaid was due partly to the program’s expansion under the Affordable Care Act.

• 2. Prescription drug spending in the individual insurance market continued to expand. CMS estimated that 10 million people had coverage purchased through the Health Insurance Marketplaces (HIM). For 2016, marketplace plans accounted for 40% of individually-purchased private insurance plans. The 2016 growth reflected higher enrollment in HIM plans. Given the political environment, the outlook for these plans is highly uncertain.

• 3. Employers’ drug spending was almost flat. Our analysis shows that drug spending by employers grew by less than 1% in 2016. By contrast, spending by employer-sponsored plans grew by 10.6% in 2014. Employers benefited from their strategy of forcing patients to absorb the costs of more-expensive specialty medications. See Employer Pharmacy Benefits in 2017: More Cost-Shifting to Patients As Tiers and Coinsurance Expand.
  
  As I note above, employer-sponsored private insurance accounted for a smaller share of drug spending than government sources did. Note that our methodology splits CMS’s private-insurance figures into (1) Employer-Sponsored Private Insurance, and (2) Individually-Purchased Private Insurance.

• 4. Consumers’ share dropped again, highlighting a good news/bad news trend. In 2016, consumers’ out-of-pocket expenses—cash-pay prescriptions plus copayments and coinsurance—fell by $436 million, from $45.5 billion in 2015 to $45.0 billion in 2016. Consumers’ share of outpatient prescription drug expenditures expenses also shrank, from 14.0% in 2015 to a historically low 13.7% in 2016.
  
  In its Health Affairs article, CMS cited: (1) the increased use of generics, (2) the increase in patients who have zero out-of-pocket costs, and (3) manufacturers’ copayment offset programs. For example, 29% of brand-name and generic prescriptions in 2016 had a $0 out-of-pocket cost, compared with 19% in 2011. (See Exhibit 86 in our 2017 Economic Report on U.S. Pharmacies and Pharmacy Benefit Managers.)
  
  I am concerned about a troubling market bifurcation in patents’ expenses. True, a growing share of prescriptions is being dispensed with no patient out-of-pocket expense. However, some people face very high out-of-pocket expenses as payers shift costs for fourth-tier and specialty drugs.

NOTES FOR NERDS

• U.S. drug spending in the NHE are roughly equivalent to total retail, mail, and specialty pharmacies’ prescription revenues minus manufacturer rebates to third-party payers. They therefore differ from pharmacies’ prescription revenues, manufacturers’ revenues, and the “invoice spending” data reported by IQVIA (formerly known as QuintilesIMS).
  
  The conceptual computation is: (1) IQVIA’s “invoice spending” for outpatient dispensing channels minus (2) off-invoice discounts and rebates provided by wholesalers (but not manufacturers) to pharmacies plus (3) gross profit margins earned by pharmacies minus (4) the share of manufacturers' rebates that are passed through to third-party payers.

• The NHE data do not measure total U.S. spending on prescription drugs. Inpatient prescription drug spending within hospitals and nearly all provider-administered outpatient drugs are reported in other categories. This additional spending accounts for an estimated additional 3% to 5% in expenditures.

• The patient’s cost share (copayment or coinsurance) is included in NHE, because patients are one of the payer types tracked by the CMS. (We are the first-party payers!)

• A growing number of people directly purchase private insurance. We refer to these policies as “Individually-Purchased Private Insurance.” These policies include Medigap Medicare supplemental coverage and all individually purchased plans, including coverage purchased through the Health Insurance Marketplaces (HIMs). Prior to 2014, marketplace plans did not exist and had little impact on enrollment.