Several studies have examined the underlying sources for the recent slowdown in health care spending. These analyses have focused largely on the role of the 2007-2009 recession, the increasing prevalence of high deductible health insurance plans, and other structural changes in the payment and delivery of care. However, the studies examining these factors do not account for the full decline in spending, or raise questions about the pattern and timing of the slowdown.
Role Of Prescription Drugs In The Health Spending Slowdown
Certainly the recession accounted for a component of the post 2007 slowdown in spending. However, the growth in real per capita health care spending is slower post 2010 than it was during the three prior years. Between 2010 and 2013 the real per capita health care spending increased 1.2 percent compared to 1.6 percent over the entire 2007 to 2013 period (Exhibit 1).
An important component of the 2010 to 2013 continued slowdown in spending was the negative growth in real per capita spending on prescription drugs (Exhibit 2). Hospital and physician spending both increased faster than the growth in total health care spending. In contrast, the growth in real per capita spending on prescription medications declined by 0.5 percent between 2010 and 2013.
Explaining The Drug Spending Decline
What accounts for the decline in drug spending during this period? One major explanation is the large number of drug patent expirations that peaked in 2012. In that year alone around $35 billion (based on 2011 sales) in branded drugs went off patent with a total of $84 billion in branded drugs coming off patent between 2010 and 2013. By 2018 an additional $76 billion worth of brand drugs are scheduled to come off patent.
Several of these branded drugs are household names (Exhibits 2 and 4). Three disease areas—mental disorders, hyperlipidemia, and hypertension—had some of the biggest selling medications that came off patent. Exhibit 3 shows the most popular medications for the treatment of hyperlipidemia and how sales moved across brand and generic treatments. Drug sales were nearly $5 billion lower between 2011 and 2012 for these cholesterol medications. The totals were dominated by changes in Lipitor sales, which declined by $74 billion. Over $2 billion of the declining Lipitor sales simply switched to the generic version of Lipitor, Atorvastatin. Other competitive brand name medications were largely unchanged between 2011 and 2012.
Similar trends were observed during the same period for the treatment of mental disorders (Exhibit 4). Three major medications, Zyprexa, Concerta, and Seroquel came off patent in 2011. As a result, sales for these medications declined by nearly $8 billion in 2012. Medications for a variety of other conditions coming off patent included Prevacid, Singulair, Plavix, and Actos collectively accounted for a reduction of $17.6 billion in sales compared to the year before they went off patent.
Total spending on some medical conditions actually declined in real terms between 2008 and 2012, and reduced pharmaceutical costs were a likely major contributor to these declines. Tabulations of data from the Medical Expenditure Panel Surveys for those years show that inflation adjusted total spending on treating hyperlipidemia, hypertension, and heart disease decreased by over $16 billion. This represents a 13 percent reduction in real spending on these conditions. Even assuming there were no change in real spending for treating these three conditions over this period, average spending growth would have increased by an additional 0.5 percentage points.
How Generic Drugs Impact Spending
Drugs coming off patent, especially those used to treat chronic disease, have the potential to impact health care spending in direct and indirect ways. The direct effect is the simple reduction in costs incurred by switching patients on the drugs to cheaper generics. This is straightforward to measure and quantify, because switching behavior is observable in many national surveys.
The indirect effect arises through potentially better medication adherence by patients with chronic disease because they can substitute to generic prescriptions that are much less costly. As this occurs these patients may be less likely to be hospitalized, or if they are they are less likely to be readmitted. Interestingly, readmission trends indicate slight reductions in readmissions for those with chronic conditions over the same period as these patents expired. Indeed, medication reconciliation and adherence has become a process improvement strategy to reduce readmission in the new era of readmission penalty programs.
The simultaneity of many of these policy and clinical changes coupled with other market forces on spending make it difficult to assess the indirect effect of prescription drug patent expirations on spending. In fact, some of these factors may be necessary but not sufficient to lower health care spending in isolation.
Health care process improvements to increase adherence may only be effective in reducing costs in the presence of lower cost drug options, and vice versa. As such, more research is needed to ascertain the magnitude of this indirect effect. This is of immediate policy importance. As others have pointed out, slowdowns in technological development in health care is a potential explanation for the recent unprecedented abatement in cost growth. With the anticipated new waves of compounds to treat these conditions reaching the market, the curve may start bending the other way.
Exhibit 1. Average Annual Growth In Real Per Capita Health Care Spending, 2000-2013
Source: National Health Expenditures, Centers for Medicare and Medicaid Services
Exhibit 2. Average Annual Increase In Health Care Spending By Source, 2000-2013
Source: National Health Expenditures, Centers for Medicare and Medicaid Services
Exhibit 3. Change In Prescription Drug Spending For Treatment Of Hyperlipidemia, 2010 – 2012 (Billions /Dollars)
Source: Data from Drugs.com
Exhibit 4. Impact of Patent Expiration On Drug Sales Through 2012, In Year Of Patent Expiration (Billions/Dollars)
Source: Data from Drugs.com
Authors’ Note
This work was funded in part by the Commonwealth Fund, the opinions reflected here do not necessarily reflect those of the Fund.
