Flat Growth in Healthcare Spending, Drug Approvals

Increases in total national healthcare costs have slowed along with the rest of the economy, but health spending continues to grow faster than gross domestic product (GDP). New National Health Expenditure Accounts (NHEA) data released by the Centers for Medicare & Medicaid Services (CMS) show that health spending in the United States grew by 4.4% in 2008, and the portion of GDP devoted to healthcare continues to increase. Meanwhile, the number of new pharmaceuticals approved by the US Food and Drug Administration (FDA) remained stable in 2009, and spending on prescription drugs grew at a reduced pace.

NHEA data on total annual spending include the cost of public and private health insurance and program administration as well as investments in healthcare research, infrastructure, and equipment. The findings were reported by CMS’ Office of the Actuary and published in the health policy journal Health Affairs [2010;29(1):147-155]. In the report, the economic recession is defined as having begun in December 2007.

According to CMS, the total sum of health spending in the United States was $2.3 trillion or $7681 per person in 2008. This was the slowest rate of growth since CMS started officially tracking expenditures in 1960. Despite slower growth, however, healthcare spending continued to outpace growth in GDP, which increased by 2.6% in 2008. By 2018, CMS predicts that national health spending will reach $4.4 trillion and comprise about 20% of GDP.

In response to CMS’ report, the health insurer trade association put the findings in the context of healthcare reform efforts that have dominated the debate on healthcare costs. “The latest national health expenditure data demonstrate why healthcare reform needs to include a long-term strategy to reduce the growth of healthcare costs. Healthcare spending continues to rise faster than the economy as a whole, further straining family budgets and crowding out of other urgent domestic priorities, such as education, energy, and the environment,” said Karen Ignagni, president and CEO of America’s Health Insurance Plans.

The 4.4% growth in 2008 was down from 6.0% in 2007, as spending slowed for nearly all healthcare goods and services, particularly for hospitals (4.5% in 2008; 5.9% in 2007). However, health spending as a share of the nation’s GDP continued to climb, reaching 16.2% in 2008 compared with 15.9% in 2007. CMS officials said that larger increases in the health spending share of GDP generally occur during or just after periods of economic recession.

The economic downturn significantly impacted health spending as more Americans could not afford to spend their limited resources on healthcare and instead went without care, CMS said in a statement. This led to slower growth in personal healthcare paid by private sources of funds, which increased only 2.8% in 2008. The recession also made it difficult for many Americans to afford private health insurance coverage, leading to lower growth in private health insurance benefit spending, which slowed to 3.9% in 2008. CMS further explained that the subset of national spending devoted specifically toward the purchase of healthcare goods and services, called personal healthcare spending, increased by 4.6% in 2008.

CMS administrators also used the release of health expenditure data to stump for reform. “This report contains some welcome news and yet another warning sign,” said Jonathan Blum, director of CMS’ Center for Medicare Management. “Healthcare spending as a percentage of GDP is rising at an unsustainable rate. It is clear that we need health insurance reform now.”

Health spending was also impacted by the American Recovery and Reinvestment Act of 2009, which provided a temporary 27-month increase in Federal Medical Assistance Percentages used to determine the federal Medicaid payments to states. The legislation led to approximately $7 billion of Medicaid spending shifting from states to the federal government for the last quarter of 2008.

Medicare spending grew 8.6% in 2008 to $469.2 billion, following growth of 7.1% in 2007. Spending growth for fee-for-service (FFS) Medicare accelerated to 5.3% in 2008 compared with 3.8% growth in 2007. Medicare Advantage (MA) spending increased 21.3% in 2008, similar to the 22.1% growth in 2007, the result of a continued shift in enrollment as beneficiaries switched from traditional FFS into MA plans. Total Part D spending increased 10.0% to $51.5 billion in 2008.

Private health insurance premiums grew 3.1% in 2008 compared with 4.4% growth in 2007. And growth in benefit payments by private health insurance also slowed to 3.9% in 2008 from 4.8% in 2007.

Drug Approvals and Spending

During the first week of 2010, the investment research group Washington Analysis reported that there were 26 new drugs approved in 2009, up from 25 in 2008. In keeping with the agency’s recent safety emphasis, the FDA instructed drug manufacturers to add 31 new or updated boxed warnings to the prescribing information of marketed products, a decrease from the 56 boxed warnings issued in 2008.

According to the Pharmaceutical Research and Manufacturers of America (PhRMA), 1 of every 10,000 potential medicines investigated by America’s research-based pharmaceutical companies makes it through the research and development pipeline and is approved for patient use by the FDA. Winning approval, on average, takes 15 years of research and development and costs more than $800 million.

In our own review of FDA-approved drug products listed by month at Drugs@FDA, First Report– Managed Care found that approvals in 2009 included 18 new molecular entities (NMEs), compared with 21 NMEs in 2008. The number of new formulations (34 in 2009; 33 in 2008) and new combinations (6 in 2009; 6 in 2008) remained steady. The FDA also approved 5 products in 2009 that had previously been marketed without an FDA approval, up from 1 in 2008.

The CMS report on health expenditures found that retail prescription drug spending growth decelerated to 3.2% in 2008, consistent with a slowdown in growth that began in 2000. There was a 2.5% increase in prescription drug prices in 2008 and a 1.4% increase in 2007. The recession, as well as other factors including new safety warnings, was reported to have produced a slight decrease in per capita use of prescription drugs.

A separate report prepared by the Government Accountability Office (GAO) at the request of members of Congress was released in December 2009 and blamed a market lacking therapeutically equivalent drugs and limited competition for what it termed “extraordinary price increases” for prescription drugs in 2009.

GAO defined extraordinary price increases as an increase of 100% or more at a single point in time, and the majority of all extraordinary price increases were for drugs priced less than $25 per unit. GAO reviewed the average wholesale price for all brand-name prescription drugs in Thomson Reuters’ Red Book.

From 2000 to 2008, 416 brand-name drug products had extraordinary price increases, according to the GAO analysis. The median price of branded drugs with an extraordinary price increase rose from $1.66 per unit before the increase to $4.70 per unit after the increase. More than half of the brand-name drug products that had extraordinary price increases were central nervous system, anti-infective, and cardiovascular drugs.

Despite drug price increases described by the GAO, “prescription medicines account for only 10% of healthcare spending—the same as it was back in 1960,” said Ken Johnson, senior vice president of PhRMA. “Unfortunately, medicines are always looked at as a cost and never seen as a savings, even though medicines often reduce unnecessary hospitalizations, help avoid costly medical procedures, and increase productivity through better prevention and management of chronic diseases,” he continued.

PhRMA asserts that the GAO report focuses only on a small number of selected brand medicines rather than the entire prescription drug market. Mr. Johnson referred to CMS data showing medicines are one of the slower growing areas of healthcare expenditures. “In fact, according to CMS, the 3.2% growth in prescription drug spending is the lowest growth rate in 47 years and well below the overall growth rate for healthcare. What’s more,” he continued, “in over half of the cases, according to GAO investigators, price increases were attributable to middlemen and appear to have originated from the company that repackaged the drug rather than the company that manufactured the drug.”

The PhRMA statement asserted that discovering and developing new medicines is an inherently risky and expensive business. Companies spend, on average, 10 to 15 years and $1.2 billion researching and developing an innovative medicine. And for biologics, companies devote an additional $250 million to $450 million to build specialized research and development facilities.—Charles Boersig