No End in Sight for Escalating Prescription Drug Spending


Prescription drug costs are rising more than 10% a year, which is twice the rate of medical costs increases according to an A.M. Best report. Retail prescription drug spending grew 12.2% in 2014 compared to 2.4% in 2013. Driving the rising costs are increased spending for new medications, such as specialty drugs for Hepatitis C; patents that expired, price increases for brand name drugs, and higher health plan enrollment due to the Affordable Care Act (ACA). Drug spending from private health insurance, Medicare, and Medicaid accelerated in 2014. These costs have affected insurers. Also consumers are paying more out-of-pocket costs.

The increase in drug costs has become divergent to other health care costs. In 2014, U.S. health care spending increased 5.3% to reach $9,523 per person. The cost growth was primarily due to major coverage expansion under the ACA, particularly for Medicaid and private health insurance. The share of the economy devoted to health care spending in 2014 was 18.1%, up from 17.5% in 2013.

The medical loss ratio (MLR) remained relatively flat from 2010 through 2013 in the low 80 percentages before a decline in the past two years to around 75%. But the MLR was more than 10 basis points higher in 2010 to 2015 when prescription drugs were included.

Employers Look to Private Exchanges

Twenty-eight percent of midsize to large employers have looked into private exchanges. Twenty-four percent say that private exchanges could provide a viable alternative for their active full-time employees as soon as 2016, according to a study by Towers Watson. These top three factors that would cause employers to adopt a private exchange for full-time active employees:
1. 64% – They see evidence that a private exchange can deliver greater value than their self-managed model.
2. 34% – Other large companies in their industry have adopted a private exchange.
3. 26% – They can’t stay below the excise tax ceiling as 2018 approaches.

In contrast, public exchanges are not on the radar. In fact, 99.5% have no plans to exit health benefits and direct active employees to a public exchange. Seventy-seven percent don’t expect public exchanges to offer a viable alternative for their full-time employees in 2015 or 2016. The Affordable Care Act’s excise tax, which is is top of mind for large employers, could cost companies billions of dollars unless they act now to keep below government-mandated cost thresholds in 2018 and beyond. Employers that have kept health care benefit costs increases lower than average are not resting on their laurels. They are working very hard to maintain that success, said Dave Osterndorf of Towers Watson.

Seventy-three percent of employers are concerned about triggering the excise tax. Forty-three percent say that avoiding the excise tax is the top priority for their health care strategies in 2015. Osterndorf said, “Private exchanges offer more choice, including account-based plans, with the tools and support for helping employees make better health decisions, and recognize the connection between their physical and financial well-being. Employee understanding and engagement are critical to the long-term sustainability of an employer’s program. Private exchanges can accelerate the fulfillment of that goal.”

Nearly three-quarters of respondents offer account-based health plans (ABHPs), with another 9% expecting to add one for the first time in 2015. Nearly 16% have adopted an ABHP as their only plan option, up from only 7% in 2012. Nearly one-third could offer ABHPs as their only option by 2015 if they follow through with plans. Private exchanges offer a new opportunity to save on health care coverage with a reduced operational burden, which is the main reason that employers are evaluating them more seriously. For more information, visit

The Evolution of ACO Partnerships in California

Unique market factors in California are driving interest in commercial accountable care organizations (ACO), according to a study by the Center for Studying Health System Change (HSC) on behalf of the California HealthCare Foundation. (ACOs are groups of providers that take responsibility for the cost and quality of care of a defined patient population.)

In California, large physician organizations are experienced in managing financial risk for patient care. Also, the growing dominance of Kaiser Permanente Health Plans has put more competitive pressure on insurers and providers.

Hospitals, physicians, and other providers are collaborating with public and private TPAs on reforming delivery and payment systems to slow health care spending growth and improve the quality of care. Medicare initiatives to develop ACOs have spurred interest in commercial ACO contracting arrangements among private insurers and providers.

On a national basis, most commercial ACO initiatives focus primarily on new provider payment approaches with existing insurance products. In contrast, California ACO collaborations have combined payment changes with new limited-network ACO insurance products. These limited-network products include financial incentives for enrollees to use ACO providers. They are usually structured as health HMO products that provide access only to ACO providers. Also, PPO products provide reduced patient cost sharing for using ACO providers.

Initial experiences reveals that some significant savings are possible. But ACO efforts require intensive collaboration and investment to support care management and exchange of sensitive performance data. These commitments present challenges even in California communities where market conditions are more favorable for ACOs. For more information, visit

Last Updated 09/12/2019

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