Issue No. 24: Spending on Drugs Rises 1.3% (Yes, 1.3%)

Despite the uproar from politicians over pharmaceutical prices, the increase in spending on prescription drugs in the United States in 2016 was only 1.3% -- by far the smallest rise in any health-care category. The stunning figure was part of a mass of data presented in a Dec. 6 Health Affairs article written by statisticians and economists in the Office of the Actuary at the Centers for Medicare and Medicare Services (CMS).

National health expenditures (NHE) rose in 2016 by 4.3%, the lowest rate since 2013. According to the article, “the slowdown was broadly based,” but the decline in the growth rate of spending on medicines was particularly dramatic.

The statistics show that the sharp rise in drug spending in 2014 and 2015 – at rates of 12.4% and 8.9%, respectively – was an aberration. “In particular,” said the article, “strong growth in spending for drugs to treat hepatitis C contributed to higher overall spending growth in 2014 and 2015.” In addition, during this period, millions of uninsured Americans gained access to medicines under the Affordable Care Act.

The Health Affairs article continued:

The 2016 rate of prescription spending growth is more in line with the lower average annual growth during the period 2010-13 of 1.2 percent – a rate that was driven by the shift to more consumption of generic drugs…. Despite these large fluctuations in growth rates over the past several years, retail prescription drugs’ 10 percent share of national health expenditures in 2016 is similar to the share in 2009.

Prescription-drug spending rose at a considerably lower rate than GDP in five of the seven years reported in the article (again, the outliers were 2014 and 2015). By contrast, hospital spending increased considerably faster than GDP in five of the seven years and about the same in other two.
 
Here is a comparison of increases in 2016 by spending category:

The Health Affairs article also reveals that drug utilization – that is, the number of prescriptions dispensed – increased 1.9%. Since total spending increased at a lower rate, unit prices for medicines actually declined in 2016.

The article also reported that total spending on generic drugs (including brand-name generics) declined in 2016. Generics constitute 84% of all prescriptions.

So why do Americans feel drug costs – and health-care costs in general – are high? The data have a good answer. It turns out that out-of-pocket spending, which includes consumer co-payments, deductibles, co-insurance, and spending for services that are not covered, rose 3.9% in 2016 -- the “fastest rate of growth since 2007 and higher than the average annual growth of 2.0 percent in 2008-15.” One major reason is the rise in the proportion of covered workers who were enrolled in high-deductible plans from 20% in 2014 to 24% in 2015 to 29% in 2016. “At the same time,” says the article, “average private health insurance deductibles for single coverage plans increased 12% in 2016.”

You might think that higher out-of-pocket costs may give workers an incentive to be better shoppers of health services, but research shows that they cause them to cut back on services they truly need, such as preventive care and medications. Those services help reduce costs in the future.

The new statistics confirm what any sophisticated analyst already knew: prescription drugs are a small portion of total health expenditures and can deliver a big bang for the buck (the hepatitis C drugs being a good example: they obviate the need for a liver transplant that can cost more than a half-million dollars). 

‘Spending…Rising Dramatically’? 
 
But critics of drug spending persist. Consider a new report from the National Academies of Sciences, Engineering and Medicine called “Making Medicines Affordable: A National Imperative.” The report goes wrong at the start by stating, “Spending on prescription drugs has been rising dramatically.” It has not. According to the CMS actuaries, from 2010 to 2016, drug costs rose from $253 billion to $339 billion, or 30%. Hospital costs over the same period rose from $822 billion to $1.1 trillion, or 32%. Overall NHE rose from $2.6 trillion to $3.3 trillion, or 28%. In other words, drug spending is rising about the same as health spending in general and a bit less than hospital spending. 

A study released in May by the IQVIA Institute for Human Data Science concluded, “Real net per capita drug spend has been relatively unchanged over the past decade.” Adjusted for inflation, spending by all parties (insurers, government agencies, employers, and individuals) on drugs per American was $811 in 2007 and $895 in 2016. That’s a compound annual growth rate of 1.1%.

The National Academies report also makes the claim: “Drug costs are a significant part of the nation’s total spending on health care.” It depends on what you mean by “significant.” Is 10% of total spending significant? Today, drugs represent 10.1% of total HCE, according to the Centers for Disease Control. In 1960, they represented 9.8%. Overall, hospital spending is triple drug spending, and physician and clinical spending is twice drug spending.

Also, it is critical to understand the forces responsible for increases in drug spending. As a September report from the QuintilesIMS Institute stated, “Revenue growth has been driven by new products and volume growth from existing products; price has been a net negative driver.” Specifically, the report found that growth in the use of existing drugs averaged 2.6%, increases in revenues from new drugs averaged 3.8%, and prices of existing drugs declined an average of 2.5%.

We hardly want to discourage the development of new drugs, and we certainly want people to use more medicines that make them healthy and keep them out of the hospital. So rising revenues in those areas are beneficial. Because of competition, especially from generics as branded drugs lose patent protection, drug costs – unlike costs in other parts of the health-care system fall over time.

The QuintilesIMS study concludes, “Net revenue growth for prescription medicines will average 2–5% through 2021; growth will be driven by new and existing products and offset by patent expiries.” That’s similar to the revenue growth range of practically every industry in America.

Proposals That Will Harm Health

If you get the problem wrong, it is hard to get the remedy right. In the “National Imperative” report, the proposals to lower costs– which we have heard many times before – would, in many cases, make matters worse. As the dissenting view accompanying the report states, “The committee’s recommendations, if actually implemented, will lead to unintended consequences that will damage the health of people in the United States and damage the health of an industry whose innovations are essential to addressing unmet medical needs in the future.”

Among the remedies proposed is to have Medicare, all 50 Medicaid state programs, the Veterans Administration and other government programs negotiate drug prices as a single block, giving them more market power as purchasers. But the top three pharmaceutical benefit managers (PBMs) already have tremendous market power, and and recent results show they use that power to keep costs down even as utilization rises. Unfortunately, some of the mechanisms that the PBMs use operate on a foundation of perverse incentives (such as rebates) that can come at the expense of the health of patients. Importantly, recent data reveal that patients aren’t directly benefiting from the savings incurred by some of the schemes utilized the PBMs. Still, more government involvement in medicine-buying will inevitably lead to more limited choices and access to care for Medicare and Medicaid beneficiaries. That has been the experience in Europe and Canada. 

There is no doubt that some drugs are indeed costly, but that’s why insurance was invented – to mitigate the pain of unexpected, big expenses. Unfortunately, the structure of health insurance policies is changing, with patients responsible for a larger proportion of the costs of advanced medicines. As we have pointed out before, the trend in insurance-policy design is to cover the cost of inexpensive generics almost entirely and to force patients to pay hundreds or thousands of dollars for specialty drugs. This is backwards.

As Adam Fein wrote last summer Drug Channels:

These benefit designs essentially discriminate against the very few patients undergoing intensive therapies for such chronic, complex illnesses as cancer, rheumatoid arthritis, multiple sclerosis, and HIV.

According to the Kaiser Family Foundation’s Annual Survey of Employer Health Benefits for 2016, more and more insurers are adding a fourth tier to their coverage plans. Last year, 32% of drug plans had a fourth tier for specialty, higher-priced drugs, compared with just 3% in 2004. And copayments (that is, what insured people pay out of their own pockets) are, on average, more than nine times higher for fourth-tier specialty drugs than they are for first-tier generics. That multiple has nearly doubled since 2004.

As a result, writes Fein, even if you have a good commercial insurance policy with your employer, you “would pay about $1,000 for a specialty prescription of about $3,500.” About one-fifth of plans with a specialty-drug tier have no limit at all on what a patient pays in coinsurance.

The Year Ends, the Myths Persist

This edition ends our newsletter’s first year, and, just as at the start of 2017, politicians and media are still purveying pernicious myths about health-care costs. But a flood of data shows otherwise. There is probably no better example of the prevailing misunderstanding than the conclusion of the prestigious National Academics that “spending on prescription drugs has been rising dramatically.”Our impression, however is that, slowly but surely, minds are changing.

No one denies that reasonable steps need to be taken to constrain spending – and the smartest step is to increase competition. We have a tried-and-true mechanism in generics and their analogue for sophisticated biologic products called biosimilars.

Our mission continues in 2018: to inject sanity and facts into the debate over health-care costs, so that decision-makers in the public and private sector can make wiser choices.