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More Thoughts on 2011 National Health Expenditures & Prescription Drugs

The latest annual CMS report on national health expenditures for 2011 released last week has generated lots of media and wonk attention about the historic lows in health spending increases and questions about whether these trends can be sustained.   The best analysis we have seen on the prescription drug component of 2011 health spending is Dr. Adam Fein’s concise write-up at Drug Channels.

While most of the 2011 data points have been scrutinized and analyzed, there are a few interesting nuggets in the data – both implicit and explicit – that merit additional attention.

1)  The 2011 Payer Mix.  Check out the following pie chart about health spending by type of sponsor.   The percentage of total health spending financed by the federal, state, and local governments is now at 45 percent, which is not surprising.   What may be surprising (at least to the non-wonks) is that household spending as a percent of overall health spending equals the federal government’s share and far outstrips that of business spending.   Health care debates, particularly with the center-right, have often been driven by employers’ perspectives on proposed policy and regulatory changes.   As businesses’ share of health spending slows – and government’s share of overall total health spending increases – how might those changes affect the political debate?  What else does this mean that households are shouldering more overall costs than businesses?


2)  Medicare Part D leaving money on the table (again).  There is no question that Medicare Part D has been a tremendous success since going live in 2006.  Beneficiaries report high satisfaction and broad access to pharmacies and prescriptions and the program’s costs have come in significantly below original forecasts.  The program’s design deserves much of the credit for these successes.  To a large degree (certainly relative to other public programs’ pharmacy benefits), Medicare Part D relies on a competitive, market-based model that utilizes many proven tools and techniques from Fortune 500 and federal and state-employee benefit plans.   

That said, when we see data points showing that Part D is the fastest growing payer of prescription drugs, we can’t help but cringe.   Yes, some of this growth is driven by increased utilization.  Yet, specific policy choices are causing Part D to leave money on the table — money that could help drive down Part D premiums and generate more competition.   Medicare Part D effectively insulates six classes of prescription drugs – antidepressants, antipsychotics, anticonvulsants, antiretroviral, antineoplastic, and immunosuppressants – from lower-cost generic competition by requiring coverage for all or “substantially all” drugs in these classes.   CMS has estimated the cost impact of this requirement on Part D is $4.2 billion over 10 years.    Further, Part D formularies require coverage for at least two drugs per therapeutic class – again, a structure at odds with how successful private-sector pharmacy benefits are designed.    A recent study posted on Health Affairs suggests moving Part D to a more competitive formulary design could help lower drug prices by “hundreds of millions of dollars per year.”     

3)  Specialty drug trends ominous sign for prescription-drug spending.  The CMS report notes that the increase in prescription drug costs in 2011 “was partly due to both faster growth in prescription drug prices, particularly for brand-name and specialty drugs, and increased spending on new brands.”  As we observed last month, the rising cost of specialty drugs threatens to undermine the progress made on reining in prescription drug trend.  One of the most important tools – generic substitution – is not readily available for biologic drugs.   We have noted previously, but it is worth repeating:  according to Express Scripts, the large national PBM, biologics are consumed by about 1 to 3% of the population, but account currently for a whopping 30 to 40% of total U.S. prescription drug spending.  Moreover, by 2016, seven of the top 10 drugs in the U.S. will be biologics. 

Please don’t hesitate to share any other thoughts you’ve taken away from the 2011 data points on national health expenditures.