Latest CMS Data Reveal the Truth About U.S. Drug Spending

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

As you will see, retail and mail prescription drug spending remain a consistently small share of the $4.5 trillion that we spend on U.S. healthcare.

And contrary to what you might read, drug spending growth was *not* driven by purportedly “skyrocketing” drug prices. In reality, nearly all drug spending growth occurred due to growth in the number of people treated, prescriptions dispensed, and other nonprice factors.

Tomorrow, we’ll be treated to a Senate show trial featuring pharmaceutical company executives. Sadly, pharma industry perma-critics refuse to accept that brand-name drug prices are falling—or that prescription drug spending is a small and stable portion of overall U.S. healthcare expenditures. Will drug pricing flat earthers (#DPFE) ever acknowledge the data?

I ♥ DATA

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

• National Health Care Spending In 2022: Growth Similar To Prepandemic Rates (This Health Affairs article is free for subscribers; others may purchase it.)

• National Health Expenditures historical data files (Free to all! Enjoy.)

For crucial context about these data, see the Notes for Nerds section, below.

BIG DOLLARS GET BIGGER

As measured in the National Health Expenditures (NHE) accounts, total U.S. spending on healthcare was an astonishing $4,464,573,000,000 ($4.5 trillion) in 2022, up 4.1% from the 2021 figure. The chart below summarizes the major spending categories.

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Some fun facts about these data:

• More than $2.5 trillion (57%) in total 2022 healthcare expenditures came from hospital care and professional services (physicians, dentists, and other healthcare professionals). These categories’ shares have been consistent for many years. In keeping with previous years’ figures, spending on hospital care and professional healthcare services was more than six times higher than spending on outpatient prescription drugs.

• In 2022, U.S. net spending on outpatient prescription drugs dispensed by retail and mail pharmacies was $405.9 billion. As I explain below, this spending figure is roughly comparable to net, post-rebate spending on patient-administered drugs paid under the pharmacy benefit.

• For 2022, outpatient prescription drugs accounted for only 9.1% of U.S. healthcare spending. Prescription drugs have consistently been 9% to 10% of total U.S. spending since 2000.

• Inpatient prescription drug spending within hospitals and spending on nearly all provider-administered outpatient drugs are reported within the hospital and professional services categories. This spending accounts for an estimated additional 4% to 5% of national health expenditures. (source)

• Total administrative costs—the net cost of health insurance and government administration—were $333.7 billion, or 7.5% of national expenditures.

Note that due to the COVID-19 pandemic, healthcare spending by the federal government increased by $415 million (+40%) in 2020. This amount had decreased slightly by 2022, but it remained $379 million higher than 2019’s pre-pandemic figure. For other important details about these data, see our Notes for Nerds, below.

DECONSTRUCTING SPENDING

For 2022, spending on outpatient prescription drugs grew by 8.4%. This was above the spending growth rate of professional services (+2.6%), hospital care (+2.2%), and overall national healthcare costs (+4.1%). The COVID-19 pandemic influenced these relative growth rates, because demand for prescription drugs remained steady as pandemic waned during 2022.

Understanding growth in spending is complex, because year-over-year changes in drug spending have two primary components:

• Unit costs—the payer’s cost per unit of therapy. Unit costs vary with:
  • Inflation and deflation in net, post-rebate drug prices
  • Shifts to different drug options within a therapeutic class
  • A shift in mix of therapeutic classes utilized by patients
  • Substitution among lower-priced and higher-priced therapies

• Utilization—the total quantity of drugs obtained by a payer’s beneficiaries. Utilization varies with:
  • The number of people on drug therapy
  • The degree to which they adhere to their drug therapy
  • The average number of days of treatment

Consequently, the total 8.4% change in drug spending measured in the NHE data equals the sum of changes in prices and such non-price factors as utilization and drug mix. The chart below shows the deconstruction for outpatient prescription drug spending as reported in the NHE data.

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For each of the past five years, changes in nonprice factors have accounted for a much greater share of prescription drug spending growth than have overall changes in prices.

• From 2018 through 2021, CMS computed that overall drug prices fell, so nonprice factors accounted for more than 100% of the changes in spending.

• CMS computed that average drug prices grew by 1.2% in 2022, so non-price factors accounted for 86% of the total 8.4% growth in spending.

SIGH

Based on the NHE and the Altarum estimates, total net drug spending accounts for about 15% of U.S. health spending.

Guess what? Net retail and nonretail drug spending accounts for 14% to 18% of total healthcare spending in most countries. (See page 5 of this enlightening 2021 IQVIA report.) That’s right. Despite the political rhetoric, U.S. drug spending is—and has been—in the middle of the pack as a share of total healthcare spending. That's because EVERYTHING costs more in U.S. healthcare, not just pharmaceuticals.

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Alas, the unalterable dogmas that dominate public debates over prescription drug spending appear to be unaffected by the unfashionable “facts” and “data” that I discuss above. As the Inflation Reduction Act of 2022 rolls out, get ready for more unhinged rhetoric from lazy journalists, polemical politicians, and members of this scientific organization.

NOTES FOR NERDS

• U.S. drug spending in the NHE is roughly equivalent to total retail, mail, long-term care, and specialty pharmacies’ prescription revenues minus manufacturer rebates to third-party payers. It therefore differs from pharmacies’ prescription revenues, manufacturers’ revenues, and the “nondiscounted invoice price spending” data reported by IQVIA.

• We define “Professional Care” to include these NHE categories: Physician and Clinical Services; Dental Services; and Other Professional Services.

• 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 estimates that provider-administered drugs account for additional drug expenditures of 4% to 5% of NHE. We note this additional spending in the first chart above. See Projections of the Non-Retail Prescription Drug Share of National Health Expenditures, Altarum, July 2022.

• Supplemental table 23 in the National Health Expenditures (NHE) historical data reporting shows changes in price indices for the major NHE categories. Changes in prescription drug utilization—which CMS describes as “intensity and quantity of health care services delivered per person”—were imputed from the overall change in spending and the change in prices.