As you will see below, CMS projects that outpatient prescription drugs dispensed by retail and mail pharmacies will remain a small share of total U.S. healthcare spending. The Inflation Reduction Act’s changes to the Medicare Part D program, along with coming demographic shifts, will have a significant impact on future spending by government programs and consumers.
Nonetheless, taxpayers—primarily via Medicare and Medicaid—will continue to dominate the employer-sponsored insurance market. Like it or not, vertically integrated insurers, PBMs, specialty pharmacies, and providers will continue to prosper.
I ♥ DATA
The Office of the Actuary at CMS publishes projections for U.S. National Health Expenditures (NHE). These projections include spending on prescription drugs sold through outpatient retail, mail, and specialty pharmacies.
As always, I encourage you to review the source materials:
- National Health Expenditure Projections, 2023–32: Payer Trends Diverge As Pandemic-Related Policies Fade (Health Affairs article from CMS staff)
- National Health Expenditure Projections 2023–32 (Summary presentation deck from CMS)
- National Health Expenditures data files (Party time!)
STILL NOT SKYROCKETING
The top line projections highlight the government’s official, apolitical view that prescription drugs will have a modest impact on U.S. healthcare costs.
Outpatient prescription drug spending from retail and mail pharmacies is expected to grow slightly faster than overall healthcare spending. CMS projects that from 2022 to 2032, total health spending will grow at an average rate of 5.6% per year, while prescription drug spending will at an average rate of 6.0% per year.
Consequently, outpatient prescription drug spending is projected to remain a small portion of overall U.S. healthcare expenditures. CMS projects that outpatient prescription drugs will account for 9.5% of 2030 national healthcare expenditures—compared with 9.1% in 2022. Prescription drugs have consistently been 9% to 10% of total U.S. spending since 2000.
Long-time NHE fans know that CMS’ projections of drug spending growth have, on average, overestimated this spending, so the figures could be even lower. See Chart #3 in the Analysis of National Health Expenditure Projections Accuracy for commentary on the factors behind these historical underforecasts.
PAY ATTENTION
The chart below presents DCI’s summary of the historical and projected payer mix for net prescription spending.
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Observations on these projections:
- The Inflation Reduction Act and Baby Boomer demographics will limit growth in Medicare’s spending on prescription drugs. Medicare’s share of overall prescription spending increased from 2% in 2005 to 18% in 2006, when the Part D program launched. It has since grown to the 32% shown above. By 2032, CMS projects that Medicare’s share will continue growing, to 36%.
However, Medicare’s spending growth rate will fluctuate dramatically over the projection period. For 2024, CMS projects double-digit spending growth (13.3%), due to the IRA’s Part D redesign. Spending growth will decelerate to 2.6% for 2025. But Medicare’s net spending on prescription drugs will then grow by 12.0% in 2026 and 11.1% in 2027, before slowing to sub-5% growth during 2028 through 2032.
In its Health Affairs article, CMS calls out “expected reductions in rebates on drugs with negotiated prices” as a key factor behind the 2026 and 2027 growth spike. Check out Table IV.B8. of the 2024 Medicare Trustees Report, which shows a dramatic decline in direct and indirect remuneration (DIR) from manufacturer rebates. As I explained Why the IRA Will Encourage Part D Plans to Prefer High-List, High-Rebate Drugs (video), the IRA’s price-setting process substitutes manufacturer rebates to Part D plans for discounts provided to the government.
Demographics will also play a role in Medicare’s future growth. Reality bites for Generation X in 2030. Consequently, growth in Medicare enrollment will slow to 1.2% by 2032. Whatever, nevermind.
- Medicaid’s share of spending will fall from its pandemic peaks. Over the past few years, Medicaid has been the fastest-growing source of insurance coverage in the United States. Enrollment in the program swelled due to the COVID-19 pandemic and its associated policy choices. Consequently, growth in Medicaid spending on prescription drugs was 15.1% for 2021 and 14.2% for 2022. For more on Medicaid’s growth, see Section 4.1.1. of DCI’s pharmacy/PBM report.
CMS projects that Medicaid enrollment will have peaked in 2023, at 91.2 million people. Due to enrollment declines, however, CMS estimates that Medicaid’s share of prescription drug spending declined last year, from 11.1% in 2022 to 10.2% in 2023.
By 2025, CMS expects Medicaid enrollment will fall to 79.4 million people, and thereafter grow by about 1% per year. CMS projects that Medicaid’s net spending on prescription drugs will fall by 3.0% during 2024. From 2025 to 2032, Medicaid’s net spending on prescription drugs will grow at an average annual rate of 6.2%.
- Private insurance’s share of spending on prescription drugs will grow, driven by individually purchased marketplace plans. Private health insurance for prescription drugs grew most quickly during the 1980s and 1990s, when most employers added pharmacy benefits. Its share peaked in 2001, at 50% of net prescription drug spending. Private insurance paid for only 38% of outpatient drug spending in 2022. As you can see above, CMS projects that private insurance share of spending will increase slightly over the next 10 years.
CMS has assumed that as the U.S. population ages, the employer-sponsored insurance market will continue to shrink as a share of total insurance enrollment. Total enrollment will increase slowly, growing from 175.1 million in 2022 to 176.4 million in 2032. DCI estimates that employer-sponsored private health insurance will pay for only 34% of prescription spending by 2032.
Note CMS’s “private insurance” category also includes individually purchased private insurance. These policies include Medigap Medicare supplemental coverage and all individually purchased plans, including coverage purchased through the health insurance marketplaces. Since 2013, the greatest growth in this category has come from marketplace plans. DCI estimates that individually purchased private insurance will account for nearly 5% of prescription spending in 2032.
As far as I can tell, CMS has not modelled any spillover effects from the IRA’s implementation to the private insurance market. Hmm.
- Consumers’ share of outpatient drug spending will continue to decline, but remain disproportionately higher than that of other healthcare services. In 2022, consumers’ out-of-pocket prescription expenses—cash-pay prescriptions plus copayments and coinsurance—were $56.7 billion. That equated to 14% of net outpatient prescription drug expenditures.
As you can see from the chart above, consumers’ collective share of outpatient prescription drug expenditures has declined over time. Consumer expenses accounted for 80% of total U.S. outpatient prescription drug expenditures in 1972. CMS projects that consumers’ share will continue to decline, to 11% of net spending by 2032.
The IRA will slow growth in out-of-pocket spending to only 0.3% for 2025 and 3.2% for 2026. This forecast reflects the effects of the new Part D spending cap and, starting in 2026, the shift of formulary rebates to point-of-sale discounts for products with a maximum fair price (MFP).
Note that consumers will continue to shoulder a much higher portion of drug spending compared with their share of hospital spending. For 2032, CMS projects that consumers’ out-of-pocket spending for hospital care will be $53.3 billion—far below consumer’s projected $79.9 billion out-of-pocket spending for outpatient prescriptions. However, CMS projects that hospital spending will reach $2.4 trillion by 2032, while outpatient drug spending will hit $728 billion. Nonetheless, I still expect hospital lobbyists to be complaining about drug costs in 2032.
CMS’ latest projections reinforce how the government’s influence will grow in the coming years.
Including other state and federal programs, CMS projects that public funds will account for more than half of outpatient retail prescription spending from 2027 onward. Public payers’ collective share will peak in 2029, at 51.7% of spending.
Don’t forget that federal and state government employees account for more than 10% of employer-sponsored insurance spending, so total taxpayer spending on healthcare is even higher than the CMS-reported figures.
The chart below shows net outpatient drug spending as a share of U.S. national health expenditures for each of the three largest payer types tracked by CMS. The percentages differ among payers partly because the populations covered by different payers have different medical needs. In addition, rebate amounts differ.
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I doubt that that the U.S. will ever shift to a government-run healthcare system. Instead, most of the government’s spending will continue to flow through private companies, via Medicare Part D prescription drug plans, Medicare Advantage, managed Medicaid, and private insurance purchased on the public exchanges.
Consequently, the vertically integrated insurers, PBMs, specialty pharmacies, and providers within U.S. drug channels will become even more powerful in U.S. drug channels. Don’t say you weren’t warned!
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.
- 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. See Projections of the Non-Retail Prescription Drug Share of National Health Expenditures, Altarum, July 2022.
- The NHE’s Medicare figures combine Part D drug expenditures with a small amount of Part B spending in traditional Medicare fee-for-service programs. Its private health insurance figures include employer-sponsored insurance, Medicare supplemental coverage, and all individually purchased plans, including coverage purchased through the marketplaces.
- The NHE’s projections provide less detail than the historical data set from 2022 that we reviewed in Latest CMS Data Reveal the Truth About U.S. Drug Spending. In Chapter 4 of DCI’s 2024 Economic Report on U.S. Pharmacies and Pharmacy Benefit Managers, we use NHE data to provide separate spending estimates of employer-sponsored vs. individually purchased private insurance.
- CMS did not provide projections for drug spending within the two sub-categories of private health insurance. Therefore, we disaggregated total private health insurance spending using CMS’s enrollment data. We assume that total private insurance drug spending will be proportional to overall healthcare spending by those with (1) employer-sponsored private insurance and (2) individually purchased private insurance. If exchange enrollees’ pharmacy benefit spending ends up being higher than traditional private insurance, then DCI's estimates for exchange spending will prove to have been too low.
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