A Look at Drug Spending in the U.S.

Estimates and projections from various stakeholders

A Look at Drug Spending in the U.S.

This fact sheet was updated on Aug. 28, 2018, to reflect newly published data. 

Overview

Spending on prescription drugs in the United States is on the rise and is projected to outpace growth in other parts of the health care sector in 2018.1 Limited public data on how much various payers and supply chain intermediaries pay for prescription drugs, as well as a lack of consensus on a single metric for drug expenditures, presents methodological challenges in measuring drug spending.

Nevertheless, a number of public and private organizations have published drug spending estimates over the past several years, including the share of health spending attributable to drugs. Historical estimates and spending projections from the Department of Health and Human Services’ Office of the Assistant Secretary for Planning and Evaluation (ASPE), the Centers for Medicare & Medicaid Services’ (CMS’) National Health Expenditure Accounts (NHEA), the Altarum Institute, and IQVIA are presented below.

 

Figure 1 illustrates estimates and projections of U.S. drug spending by source from 2010 to 2020. Each adjusts for rebates and excludes over-the-counter (OTC) products:

  • Altarum Institute estimates total prescription drug spending, relying on CMS’ NHEA data for retail spend and IQVIA data to add a nonretail estimate.2
  • ASPE estimates total prescription drug spending, including retail and nonretail, using CMS NHEA, IQVIA, and Altarum Institute data.3
  • CMS’ NHEA data provide estimates of retail prescription drug spending, excluding nonretail.4
  • IQVIA estimates total manufacturer revenue (“net price spending”), accounting for rebates and other price concessions.5 IQVIA also breaks down manufacturer revenue for drugs sold in both retail and nonretail settings. 

Figure 2 illustrates estimates and projections of drug spending broken down by retail and nonretail components from 2013 to 2020. 

  • Retail prescription drugs: Drugs sold in a retail setting, such as by a pharmacy, drugstore, mail-order, or other mass-merchandising establishment.
  • Nonretail prescription drugs: Drugs dispensed in clinics and institutional settings, such as hospitals, long-term care facilities, and nursing homes.

Altarum Institute reports CMS NHEA estimates and projections of drug spend, which incorporate spending at the retail pharmacy level. IQVIA estimates manufacturer revenue on nonretail drugs. Altarum Institute uses the IQVIA nonretail estimates but adjusts upward for margins and markups of hospitals, physician and clinical settings, nursing homes, and home health settings. Altarum Institute also assumes an annual nonretail growth rate equal to that projected by CMS for retail drugs.

Figure 3 illustrates drug spending as a percentage of health expenditure. Each of these estimates incorporates rebates and spending in retail and nonretail settings excluding OTC products, unless noted below.

  • The Altarum Institute estimates total prescription drug spending (retail and nonretail) as a percentage of total national health expenditures.
  • ASPE estimates total drug spending (retail and nonretail) as a percentage of personal health expenditures, a subset of national health expenditures.
  • CMS NHEA estimates drug spending (excluding nonretail) as a percentage of total national health expenditures.
  • IQVIA estimates net drug spending (retail and nonretail) as a percentage of health care spending, including OTC products that do not require a prescription. 

Organizations use different denominators to describe health care expenditures

  • National health expenditures: Total health expenditures, including medical spending and public health activities, administrative costs, and research investments (Altarum Institute and CMS).
  • Personal health expenditures: Spending exclusively on direct patient care (ASPE).
  • Health care spending: An estimate of health care spending from the World Health Organization (IQVIA).

What drug spending estimates include

  • Rebates: Drug price reductions intended to increase sales through formulary placement. While the method used to calculate the rebate is specified at the time of purchase, the actual rebate is received in the future, as it is based on product sales. Most rebates are paid to pharmacy benefit managers and health plans. Rebates are accounted for in all five estimates, but none of the organizations has access to the specifics of manufacturer agreements.  IQVIA approximates rebates and other price concessions using publicly available wholesaler and pharmaceutical sales data, public financial filings, the Medicare Trustees report, and proprietary audits. CMS NHEA adjusts estimated drug expenditures to account for rebates in retail and mail-order settings.11 Altarum Institute and ASPE apply CMS’ rebate adjustments to their drug expenditure estimates.
  • Margins and markups: The difference between what is reimbursed by a payer and the acquisition cost of a delivering entity, such as a pharmacy, hospital, or outpatient clinic.
  • Payers: Entities other than patients responsible for paying health care costs. In the United States, payers generally include insurance companies, health plan sponsors—such as employers or unions—and pharmacy benefit managers. Medicare is the nation’s largest payer. CMS NHEA data include estimates of pharmaceutical expenditures by private health insurers and public health insurers such as Medicare and Medicaid. CMS NHEA data also incorporate the amount that premiums contribute to the cost of pharmaceuticals, though the data do not include the share of premiums that go toward pharmaceuticals. IQVIA does not directly incorporate patient premiums in its drug spending estimates. CMS NHEA data include nonretail prescription drug spending in overall health expenditures but do not separately report spending on nonretail drugs. Spending on drugs in these sites of care is included in overall health cost estimates for each respective setting (for example, drugs purchased by hospitals are reported as hospital spending). The Altarum Institute uses IQVIA data to estimate spending on nonretail prescription drugs. ASPE and IQVIA also publish an estimate of pharmaceutical spending for both retail and nonretail outlets.
  • Over the counter: Drugs that do not require a prescription. Only the IQVIA estimate for net drug spending as a percentage of health care spending incorporates spending on OTC products.

Endnotes

  1. Gigi A. Cuckler et al., “National Health Expenditure Projections, 2017–26: Despite Uncertainty, Fundamentals Primarily Drive Spending Growth,” Health Affairs 37, no. 3 (2018): 553-63, https://www.healthaffairs.org/doi/10.1377/hlthaff.2017.1655; Sean P. Keehan et al., “National Health Expenditure Projections, 2016–25: Price Increases, Aging Push Sector to 20 Percent of Economy,” Health Affairs 36, no. 3 (2017), https://doi.org/10.1377/hlthaff.2016.1627 Centers for Medicare & Medicaid Services, “National Healthcare Expenditure Data,” accessed Feb. 14, 2018, https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData.
  2. Charles Roehrig, “Projections of the Prescription Drug Share of National Health Expenditures Including Non-Retail,” Altarum Institute (2018), https://altarum.org/sites/all/libraries/documents/Projections_of_the_Prescription_Drug_Share_of_National_Health_Expenditures_June_2018.pdf.
  3. Department of Health and Human Services, Office of the Assistant Secretary for Planning and Evaluation, “Observations on Trends in Prescription Drug Spending” (2016), https://aspe.hhs.gov/pdf-report/observations-trends-prescription-drug-spending. ASPE figures rely on data from the NHEA and the Altarum Institute. ASPE expenditures are available from 2009 to 2013 and projections from 2014 to 2018. This was a one-time publication.
  4. Centers for Medicare & Medicaid Services, “National Healthcare Expenditure Data.” CMS data are sourced from Census Bureau retail data, Medicare and Medicaid claims, and IQVIA data. CMS expenditures are available from 1970 to 2016 and projections from 2017 to 2026. CMS publishes these data annually.
  5. IQVIA, “Medicines Use and Spending in the U.S.: A Review of 2017 and Outlook to 2022” (2018), https://www.iqvia.com/institute/reports/medicine-use-and-spending-in-the-us-review-of-2017-outlook-to-2022. IQVIA data are sourced from wholesaler and pharmaceutical company sales information. IQVIA publishes expenditures from 2013 to 2017 and projections from 2018 to 2022. It updates this publication annually.
  6. Charles Roehrig, “A Ten Year Projection of the Prescription Drug Share of National Health Expenditures Including Non-Retail,” Altarum Institute (updated 2017), https://altarum.org/sites/default/files/uploaded-publication-files/Non-Retail%20Rx%20Forecast%20Data%20Brief%20with%20Addendum%20May%202017.pdf.
  7. Department of Health and Human Services, Office of the Assistant Secretary for Planning and Evaluation, “Observations on Trends.”
  8. Centers for Medicare & Medicaid Services, “National Healthcare Expenditure Data.”
  9. IQVIA, “Understanding the Dynamics of Drug Expenditure: Shares, Levels, Compositions and Drivers” (2017) https://www.iqvia.com/institute/reports/understanding-the-dynamics-of-drug-expenditure-shares-levels-compositions-and-drivers. IQVIA data are sourced from wholesaler and pharmaceutical company sales information and the World Health Organization’s Global Health Expenditure Database from December 2016. This one-time publication includes expenditures from 1995 to 2015.
  10. IQVIA accounts for but does not report drug supply and payment chain entity profit retentions (e.g., discounts, rebates, chargebacks and other financial transactions among manufacturers, pharmacy benefit managers, pharmacies, and wholesalers).
  11. Centers for Medicare & Medicaid, “National Health Expenditure Accounts: Methodology Paper, 2015” (2015), https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/Downloads/DSM-15.pdf.

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