Prescription Drug Trends

Sean Keehan, Senior EconomistOffice of the Actuary

Centers for Medicare and Medicaid Services

Middle Atlantic Actuarial ClubSeptember 17, 2009

Overview

• Recent historical trends in prescription drug spending

• NHE Prescription drug projections – process and results

• Issues that will impact the future drug spending trend

• Discussion and Questions

Historical Prescription Drug Spending

Definitions and Data SourcesNational Health Expenditure Accounts Definition:• The category of prescription drugs includes retail sales of

human-use dosage-form drugs, biologicals and diagnostic products. The transactions to purchase prescription drugs occur in community pharmacies, grocery store pharmacies, mail-order establishments, and mass-merchandising establishments.

Data Sources:• Census of Retail Trade• National Prescription Audit – IMS Health• Program data for Medicare, Medicaid, and other public

programs

Determining the Historical TrendGross trend:• The estimate is benchmarked to the Census of Retail Trade,

which is believed to be the most reliable source on retail drug sales

• For years following the last census, IMS Health data is primarily used to determine spending growth

Net trend:• Spending estimates need to be adjusted for rebates and intra-

health system transfers

For more information, see Smith, Cynthia, “Retail Prescription Drug Spending In The National Health Accounts,” Health Affairs (January/February 2004): 160-167.

Growth in Prescription Drug Spending and National Health Expenditures (NHE), 1980-2007

NHE Growth

Rx Growth

Source: M. Hartman et al., “National Health Spending in 2007,” Health Affairs, Jan./Feb. 2009: 246-261.

Why has growth slowed so much since 1999?

• Strong growth in utilization of lower-priced generic drugs than for higher-priced brand-name drugs– Programs were created to encourage use of

generics and discourage use of brands

• Lower new drug introductions• Drug safety concerns

NHE Prescription Drug Spending Projections

NHE Projections Model

• Contains four exogenous components– Population growth– Economy-wide price inflation– Medicare growth– Medicaid growth

NHE Projections Model

• Contains two endogenous components, determined by econometric models– Relative medical price inflation– Real per capita private personal health care

spending

NHE Projections ModelAggregate prescription drug spending growth (real per capita)

• Real per capita disposable personal income, 3-year moving average (+)• Relative prescription drug price inflation * Drug out-of-pocket share (-) • Generic dispensing rate (-)• New drug introductions, 4-year moving average (+)

Relative prescription drug price inflation • Prescription drug input price inflation (CMS market baskets), lagged one year (+)• Drug research spending, 4-year moving average (+)

Prescription Drug Spending Growth, 1980-2018

Source: A. Sisko et al., “Health Spending Projections Through 2018,” Health Affairs 28 (2009): w346 – w357 (published online 24 February 2009).

Factors Accounting for Growth in Prescription Drug Spending Per Capita

1 We use the CPI for prescription drugs and medical supplies to represent prescription drug price growth.

2 Utilization includes increases in treatment rates (# of users receiving treatment for a condition) as well as increases in treatment intensity (# of treatment days per year). As a residual, this factors also includes changes in therapeutic mix (shifts within a therapy class to higher or lower cost brands) and any errors in measuring prices or total spending.

Drug Spending in 2008

• Projected to have continued to slow, from 4.9 percent in 2007 to 3.5 percent in 2008– The slowdown is coming from utilization, which

went from 2.7 percent in 2007 to 0.2 percent in 2008; most of the utilization declines came from people in private plans who were affected by the downturn in the economy

– Price growth accelerated from a near-term low of 1.4 percent in 2007 (Wal-mart effect) to 2.5 percent in 2008

Drug Spending in 2009

• Projected to be slightly higher than 2008 at 4.0 percent with small increases expected in price and utilization growth– Economic concerns are still a factor that dampen

expected growth

• PBM data for the first 2 quarters of 2009 generally show a small increase in spending growth for their books of business

Drug Spending from 2010 to 2013

• Utilization increases expected because of the assumed recovery in the economy

• Price growth is expected to flatten in 2012 and 2013 as a few top-selling brand-name drugs (ex. Lipitor) go off patent

Drug Spending from 2014 to 2018

• Higher growth expected as the effect of new generics become smaller– Large increases in the generic dispensing rate in

2002 to 2007 cut spending growth by 2 to 3 percentage points each year

• New drug approvals, the most uncertain part of our projection, are projected to increase and begin to add to spending growth in the last half of the projection period

Issues that will impact the future drug spending trend

Drugs losing patent protection

• Over $63 billion in brand-name drug sales in 2008 are expected to lose patent protection over the next 5 years– Paragraph IV certification – an important section of the

1984 Hatch-Waxman Act that allows generic companies to ask courts to challenge enforcement of a patent; the first generic company to prevail in this type of lawsuit will receive market exclusivity of 180 days for their generic

– When a drug loses patent protection, the most significant decline in spending comes the year after the patent loss

Patent Expirations$

Bill

ion

Source: U.S. Food and Drug Administration

Drug Pipeline

• Innovation today is concentrated in biologic or specialty drugs; the category with the most development is oncology– These drugs would have high prices if approved

• Many believe that it will be difficult to increase the number of drugs approved each year because recent safety concerns has made the FDA more cautious

The Drug Development Process• Eight Stage Process – takes 10 to 12 years to complete

– (1) Discovery Stage– (2) Preclinical Animal Testing– (3) IND filing– (4) Phase I of clinical testing– (5) Phase II of clinical testing– (6) Phase III of clinical testing– (7) Long-term animal studies– (8) New drug approval

• Most cited cost estimate is $802 million (2000 dollars) but some have said this could be as much as $2 billion

Other potential trend drivers

• New or expanded indications for existing drugs• New dosage forms/new combination products• Conversions to OTC status• Use of pharmacogenomic testing approaches• Changes in disease prevalence• Prescribing practices/clinical

recommendations

Health Reform

• Brand-name drugs would be half of the cost for Medicare beneficiaries in the donut hole

• A pathway for bio-similars or generics for biologics would be established– Exclusivity period of 12 years (perhaps less)

• Negotiation of drug prices?

Concluding Thoughts

“Forecasting drug spending growth is very difficult because changes in year-to-year growth are

typically driven by extraordinary events where, for example, drugs in certain classes get pulled from the market and so utilization for the entire class

falls off a cliff.”

Ernst Berndt MIT

January 2009

Compared to recent years, growth in future drug prices will be …

HIGHER LOWER

• “For the next 3 to 5 years, I do not see any changes to the current pattern of brand-name drug price inflation of around 8 percent per year. Companies respond to their shareholders first; therefore, they are not swayed by increases in public pressure to slow price growth.” Steve Schondelmeyer, U. of Minn, October 2008

• Increases in the transparency of drug prices will force brand-name drug manufacturers to limit annual price increases of their drugs• Health plans and prescription benefit managers are becoming more sophisticated and better negotiators.

Compared to recent years, growth in future drug utilization will be …

HIGHER LOWER

• “From 2009 to 2011, I see growth in utilization of at least 3 percent, perhaps more, due to the aging of the population and physicians continuing to begin drug therapy for their patients earlier than in past years.” Laura Miller, Nat’l Assoc of Chain Drug Stores, Nov 2008• Comparative effectiveness research could lead to increased diagnosis of chronic conditions and increased compliance

• Sluggish economic growth and the impact of higher copayments for prescription drugs will keep utilization low and even more weighted toward generic drugs

Future new drug approvals will be …

HIGH LOW

• “The number of drugs pending FDA approval, combined with those that will be submitted in 2009, could mean a rebound in new drug approvals. Across all the drugs in the pipeline, an average of 30 to 35 new drug approvals is possible in each of the next three years.” 2009 Medco Drug Trend report, page 51

• “The existence of fewer, larger entities with tighter research budgets may stifle or limit innovation and the ongoing prospects for improved therapeutics reaching the market.” Aitken, Berndt and Cutler, “Prescription Drug Spending Trends In The United States: Looking Beyond The Turning Point,” HA web exclusive, 16 Dec 2008, page w158.

Discussion / Questions