A great deal of analysis has been published on the causes of the health care spending slowdown system-wide — including in the pages of Health Affairs. Much attention in particular has focused on the remarkable slowdown in Medicare spending over the past few years, and rightfully so: Spending per beneficiary actually shrank (!) by one percent this year (or grew only one percent if one removes the effects of temporary policy changes).
Yet the disproportionate role played by prescription drug spending (or Part D) has seemingly escaped notice. Despite constituting barely more than 10 percent of Medicare spending, our analysis shows that Part D has accounted for over 60 percent of the slowdown in Medicare benefits since 2011 (beyond the sequestration contained in the 2011 Budget Control Act).
Through April of this year, the last time the Congressional Budget Office (CBO) released detailed estimates of Medicare spending, CBO has lowered its projections of total spending on Medicare benefits from 2012 through 2021 by $370 billion, excluding sequestration savings. The $225 billion of that decline accounted for by Part D represents an astounding 24 percent of Part D spending. (By starting in 2011, this analysis excludes the direct impact of various spending reductions in the Affordable Care Act (ACA), although it could still reflect some ACA savings to the extent that the Medicare reforms have controlled costs better than originally anticipated.) Additionally, sequestration is responsible for $75 billion of reduced spending, and increased recoveries of improper payments amount to $85 billion, bringing the total ten-year Medicare savings to $530 billion.
Slower Growth In Part D: A Temporary Respite?
While the Medicare spending slowdown is excellent news for beneficiaries and the budget, the fact that Part D is responsible for such an outsized share of the slowdown is reason to be cautious about its permanence. Lower Part D spending primarily stems from the “patent cliff” – a number of blockbuster brand-name drugs that have lost patent protection, paving the way for cheaper generic competitors — and a decrease in the rate of introduction of new brand-name drugs. It is unclear whether these trends in the prescription drug market will continue or are temporary phenomenon — with the recent rise of specialty drugs, highlighted by the $1,000/pill Hepatitis C treatment Sovaldi, the tide may already be shifting. Moreover, it is unclear that a permanent Rx drug technological slowdown would be a positive development, even if it meant lower costs.
A recent CBO analysis highlighted that the recent slowdown in Part D can be nearly entirely explained by broader national trends in per-capita drug spending that occurred as a result of the pharmaceutical technological slowdown, as well as lower enrollment in Part D. CBO found that, between 2007 and 2010, the share of prescriptions filled with generic drugs rose from 67 percent to 78 percent nationwide (and from 63 percent to 73 percent in Part D). In addition, brand name drugs with a combined $117.2 billion in U.S. sales, including best-sellers like Nexium and Cymbalta, are expected to lose patent protection between 2012 and 2016 according to analysis from the Congressional Research Service. CBO also found that new branded pharmaceuticals have been introduced at a slower rate than in the late 1990s.
The Rest Of The Story
Part D is thus a worrisomely large part of the Medicare spending slowdown story for its prospects of continuing, but it is certainly not the entire story. In nominal dollar terms, the largest revision to Medicare made by CBO occurred in Part A (the hospital insurance component); this amounted to $280 billion of lower spending from 2012-2021, or an 8 percent decline. Actual and projected Part B (physician coverage) spending from 2012-2021, though, has increased by $135 billion since CBO’s March 2011 projections; however, this partially stems from the Sustainable Growth Rate (SGR) physician payment formula, which mandates smaller future cuts as physician payment growth slows. Ignoring the effects of the SGR, Part B spending has been slightly revised downward by $75 billion from 2012-2021, or by 3 percent.
Unlike for the systemwide slowdown, the recession and its aftermath appear to have had little effect on Medicare Part A and Part B spending; senior’s incomes are less influenced by economic downturns and the large majority of beneficiaries have supplemental coverage that shields them from most Part A and Part B cost-sharing. The primary analysis on the topic from CBO, in fact, found that only one-eighth of the slowdown in Parts A and B from 2007-2010 could be explained by factors related to the economy – and not through the usual channel of utilization impacts that take place in the private market. Rather, economic factors influenced spending by directly impacting automatic payment updates for many Medicare services that are tied to prices. In addition, more beneficiaries at each age enrolled only in Part A, likely because many older Americans were forced to remain in the workforce longer.
Another one-eighth of the slower spending growth in Parts A and B from 2007-2010 was due to a beneficiary pool whose average age was decreasing because of the influx of baby boomers, plus the increased use of prescription drugs (which studies have shown decreases spending on medical services and items besides drugs). CBO cannot explain the remaining three-quarters of the slowdown, lending evidence to the argument that some structural changes might be playing a role, although there is still much uncertainty.
Summing Up: Reason For Caution
However, extending this analysis to imply that most of the Medicare slowdown represents structural, non-temporary changes is flawed, since downward revisions to Part A and B spending represent only 27 percent of the $530 billion projected slowdown in the full program, or 40 percent of the slowdown in Medicare benefits (excluding sequestration). The sequester represents a legislative change, and the downward revisions in Part D stem from the patent cliff and a broader pharmaceutical technological slowdown, according to CBO’s analysis.
The decrease in Medicare spending growth has already been a remarkable shift, and prolonging the slowdown in Parts A and B would be a tremendously important contribution. Unfortunately, though, the outsized role that Part D has played in the Medicare slowdown is bad budget news because it may prove fleeting.