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.

Costs, Not Utilization Are Driving Children’s Healthcare Spending

In 2014, rising prices were largely to blame for the growth in children’s health care spending, according to a report from the Health Care Cost Institute (HCCI). Health care spending  for children under employer-sponsored plans grew 5.1% a year from 2010 to 2014, reaching $2,660 in 2014. But the use of health care services declined from 2012 to 2014. HCCI senior researcher Amanda Frost said, “The decline in children’s use of health care services is a relatively new trend…While we know that prices have fueled much of the spending growth in 2014, future research should examine whether these higher expenditures are leading to better health care outcomes for children.” The survey also reveals the following:

  • Out-of-pocket health care spending on children increased 5.5% a year to $472 in 2014. This growth was due partly to higher out-of-pocket spending on ER visits, which increased 11.7% annually.
  • The average price for brand prescriptions went from $7 a day in 2010 to $16 a day in 2014.
  • The rise in the average price of brand prescriptions drove spending increases. In 2014, spending for brand prescriptions rose 6.8%. The average price for generic prescriptions remained stable.
  • In 2010, the average price of a surgical admission for a child was $35,423, and jumped to $53,372 in 2014.
  • ER visits accounted for 8% of health care spending for children in 2014.
  • The average price of an ER visit increased $298 from 2010 to 2014. At the same time, the number of ER visits dropped from 181 visits per 1,000 children in 2010 to 177 visits in 2014.
  • In 2014, there were 3,228 doctor visits per 1,000 children, down slightly from the previous year.
  • Doctor visits accounted for 12% of spending in 2014 ($339 a child), and made up the largest share of health care spending for the average child.

How Benefit Structures Affect Utilization and Spending

Health insurance benefit structures, particularly cost-sharing, can encourage or discourage patients from seeking care, according to a recent study by the National Institute for Health Care Reform (NIHCR). NIHCR looked at contracts between the International Union, UAW, and Fiat Chrysler, Ford, and General Motors in 2011, which significantly changed autoworker health benefits. There was expanded coverage of outpatient physician visits and additional cost sharing for emergency department visits unless the patient was admitted to the hospital. The changes contributed to higher spending in these areas:

  • Advanced imaging
  • Diagnostic tests
  • Minor procedures
  • Prescription drugs

Lower patient cost sharing for physician visits resulted in substantially higher spending as a result of more physician visits and increased diagnostic services and procedures. However, higher cost sharing did not significantly decrease emergency department visits or expenditures.

Health Costs for Older Singles vs. Couples

During a two-year period, single and couple households ages 65 and older spent an average of $2,500 per-person on out-of-pocket costs for recurring health care services. Recurring services include doctor visits, dentist visits, and prescription drugs, according to the study by the Employee Benefit Research Institute (EBRI). However, there are large differences in non-recurring health care spending between older singles and older couples. This includes overnight hospital stays, outpatient surgery, home health care, nursing home stays, and other services. Singles 85 and older spent and average of $13,355 on non-recurring health care while couples 85 and older spent and average of $8,530 during the two-year period. Some of the largest differences involve home health care and nursing home expenses.

Health Insurers Accelerate Digital Transformation

Health insurers are using new types of information technology to become more consumer-focused, according to a study by Frost & Sullivan. The ACA has brought new regulatory and compliance obligations to the insurance industry and changed IT priorities. IT spending priorities for the health insurance industry will increasingly focus on new tools for data analytics, consumer engagement, and population health and care management. There is a strong focus on improving communication and engagement with members, including mobile and real-time decision support.

The drivers of this trend include greater consumer access to medical information via the Internet and the need for patients to take on increased financial responsibility for their healthcare costs, particularly with the rise of high-deductible health plans.

In addition to the ACA, health insurers are grappling with these key issues:

  • Continued cost inflation driven by hospitals, pharmaceutical companies and technology vendors.
  • Tougher contract negotiations with large employers and provider systems.
  • The rise of individual consumers demanding better service and lower premiums.
  • Growing experimentation with changing reimbursement models and risk-sharing arrangements, which require a more cohesive approach to sharing information with members and providers.

Nancy Fabozzi of Frost & Sullivan said, “The ACA is an overwhelmingly disruptive force for the U.S. healthcare system. Health insurance organizations will continue to respond by aggressively containing administrative costs including IT purchasing. Significant shifts in how spending is allocated across IT market segments will force many vendors to develop new strategies and capabilities, particularly for consumer and analytics IT, which is imperative to remain competitive. Frost & Sullivan predicts that he U.S. Health Insurance IT market will grow at a compound annual growth rate of 5.5% from 2015 to 2020.

Survey: Employers expect low growth in health care spending

Employers expect to spend about 4.2% more per employee on health care next year after making some changes to benefits plans, compared with a 6.4% increase in the absence of changes, a Mercer survey found. Many changes are to mitigate the effects of a forthcoming excise tax on health care spending above specified thresholds and include offering consumer-driven health plans, eliminating flexible spending accounts and using a privately run benefits exchange. The Wall Street Journal (tiered subscription model) (9/16), (9/16)

Medicaid Poses Increasing Risks to State Budgets

A rebound in healthcare spending and a shift in federal support will put more pressure on U.S. states’ long-term budgets, Fitch Ratings says. While state and local Medicaid spending growth will remain below historical levels, Fitch believes it will still outpace revenue growth, forcing states to make challenging budgetary decisions. Fitch expects most states to accelerate efforts to slow Medicaid spending and take other budgetary actions. If they do not, they face long-term budget imbalances.

The Centers for Medicare and Medicaid Services (CMS) expects state and local Medicaid spending growth to average 6.3% annually from 2014 to 2024. The increase is partially due to normalization after recession era rates bottomed at 5.2% in 2007, as well as the downshift in federal funding for the Medicaid expansion that will begin in 2016.

However, spending growth will remain below historical trends.  Fitch says that states have had some success in controlling growth in Medicaid spending, though the challenge remains substantial. Implementing managed care has been a key initiative for a number of states. From 2001 to 2013, Medicaid managed care spending increased at nearly double the rate of total Medicaid spending. Fitch says that the shift toward managed care is likely to continue.

Several states have reported net budgetary gains from ACA expansion that could offset those increased costs. CMS expects overall health spending growth to accelerate to 5.8% annually through 2024, up from 4% in 2007. The recession and its aftermath played a key role in suppressing costs in recent years.

Children’s Health Care Spending Increases under Group Plans

Children's Health Care Spending Increases Under Group Plans
Health care spending for children (birth to 18) increased 5.7% a year from 2010 to 2013 under employee group plans. That compares to a 3.9% yearly increase for the total population (birth to 64) with employer-sponsored insurance, according to a report by the Health Care Cost Institute (HCCI).Per capita spending on children reached $2,574 in 2013, a $391 increase from 2010.

The rise in children’s spending occurred despite a drop in the use of prescription drugs and emergency room visits. Spending on inpatient admissions rose in 2013 as a result of rising prices and slightly higher admission rates for children ─ particularly newborns. The average price of an inpatient admission for a child increased $744 in one year, hitting $14,685 in 2013. Inpatient admissions accounted for about 40% of per capita health care spending for infants and toddlers (birth to three).

Prescription use by children dropped in 2013. This trend, along with a continued shift from branded drugs to generics, meant that spending on children’s prescriptions slowed in 2013. For example, from 2011 to 2013, the use generic prescriptions for asthma and allergies rose more than 300% for babies, more than 700% for younger children (four to eight), more than 800% for pre-teens (nine to 13), and more than 500% for teenagers (14 to 18). At the same time, use of branded versions of these drugs declined to nearly zero.

There were fewer emergency room visits in 2013 for all children. The biggest decline was for teenage boys (a decline of 11 visits per 1,000 teen boys) and pre-teen boys (a decline of 8 visits per 1,000 pre-teen boys). For teenage girls in 2013, labor and delivery admissions declined, falling from five to four admissions (rounded) per 1,000 girls. During the study period, the number of MH/SU admissions continued to rise, increasing by one admission per 1,000 teen girls in every year of the study period, reaching 13 MH/SU admissions in 2013. In 2013, per capita spending for children (birth to 18) was $2,716 for boys and $2,426 for girls. However, spending on health care for girls was higher when children reached their teens: $2,834 compared to $2,661 for boys the same age.

Younger children had the lowest spending among the employer-sponsored insurance population under 19, partially driven by the use of fewer medical services than the other children’s age groups. Spending on these children was $1,703 per child in 2013. This was $3,110 per child less than the spending on babies (birth to 3).

Out-of-Pocket Healthcare Spending Reaches $416 Billion

Americans spent $416 billion in out-of-pocket healthcare costs in 2014. With a growth rate of 8%, it will reach $608 billion by 2019, according to a report by Kalorama Information. Out-of-pocket spending includes direct expenditures, office co-pays, hospital visits, drug purchases, and premiums.

Premiums make up the largest category of spending, but co-payments and direct payments are growing.  Direct payments are expected to grow 9.5% per year, as employers add high deductible plans. Co-payments are expected to grow 9.5% annually as plans raise co-pays and subject more products and services to co-payment. Premiums will expand by 7.1% per year.

According to Hewitt Associates, HMOs will seek double digit monthly premium increases as they face an exodus of young, healthy employees. Rx medications comprise 43% of total out-of-pocket health care costs, followed by office-based procedures at 26%. Hospital stays comprise just 1% of the average person’s out-of-pocket health care spending, although these expenditures are considerably higher for people with the highest health care expenditures.

Health Care Spending Accelerates

Spending on health care services grew 5.4% in the third quarter of 2014 (July to September) compared to the same quarter in 2013. This is substantially higher than the 3.7% rate in the second quarter and the 3.9% rate in all of 2013, according to a report by the Quarterly Services Survey. Prescription drug prices rose 4.1%, up from 3.8% in September 2014. Year-over-year hospital prices grew 1.1% in October, which is the lowest reading since September 1998. Charles Roehrig, director of Altarum’s Center for Sustainable Health Spending said, “While it is too early for definitive conclusions, this may well represent the predicted ramping up in spending by the estimated 10 million people gaining coverage in early 2014 under the Affordable Care Act.”

Last Updated 05/25/2022

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