The time is ripe for an evolution in how U.S. payers approach the management of drug spending. With recent trends in new product development, we’ve seen an explosion of therapeutic innovation as drugs are approved to address previously untreatable rare diseases, and treatments for prevalent diseases continue to improve. While it is never a good time to be a patient, more rare disease patients are now offered hope through the development and approval of complex therapeutics.
This innovation comes at a cost. In the U.S., the cost of new drugs has skyrocketed in recent years. Payers have become increasingly restrictive, as we continue to see longer formulary exclusion lists each year, and as patients are increasingly shunted towards high deductible and closed health plans, which can be more restrictive than previous options. In addition, more products are subject to traditional and innovative utilization management controls as payers seek to exert some level of control over drug spending to satisfy the expectations of their members, as well as employer groups and shareholders in some cases.
It is apparent that current payer management tactics are unable to sufficiently control drug spend without the addition of novel approaches to management, thus creating pressure for changes in their approach to drug management. In the meantime, we are likely to continue to see increasing cost burden placed on patients as payers and other stakeholders in the healthcare ecosystem strive to avoid carrying the weight of rising healthcare costs that has no end in sight.
Healthcare Costs Are Not Sustainable
The situation for patients in the U.S. appears dire. While pharmaceutical innovation has accelerated—with treatments approved for previously untreatable diseases, and additional therapeutic options available to patients in areas with existing therapies—this innovation comes at an incremental cost to patients, payers, and employers. By 2026, nearly one-fifth of worldwide prescription drug sales—a whopping $255 billion—is anticipated to be attributed to orphan and rare disease (ORD) products, which is double the 2019 sales for orphan drugs ($127 billion) (Source).
Oncology represents the largest therapeutic area in the worldwide prescription drug landscape, accounting for 21.7% market share and a sales forecast of $311 billion in 2026, reflecting a compound annual growth rate (CAGR) of 20.2% from 2019 to 2026 (Source). Overall worldwide prescription drug sales are anticipated to grow with a CAGR of 7.4% between 2020 and 2026, a steep acceleration compared to a CAGR of 2.7% between 2012 and 2019 (Source).
Figure 1: Worldwide Total Prescription Drug Sales by Product Type (2012-2026) (Source)
As orphan drug products comprise a larger share of total prescription drug sales in the U.S. and abroad, we also see an increase in the budget impact of individual products across smaller patient populations coupled with healthcare premiums growing faster than inflation and workers’ wages. Throughout the 2010s, healthcare premiums grew an average of 10% per year for individuals and nearly 13% per year for families, translating into a 54% increase from 2009 to 2019 (Source).
In the last twenty years, that translated into growth of premium costs of under $6,000 in 1999, to over $21,000 in 2020 (Source, Source). The U.S. Centers for Medicare and Medicaid Services (CMS) projects private health insurance premiums to grow an average of 4.65% per year through 2028—increasing premiums by more than 40% by the end of the decade (Source).
This contrasts starkly to the trend towards increased share of healthcare costs borne by employers and employees. From 2010 through 2020, worker contribution increased by 40%, while employer contribution increased 61% (Source). The cost of commercial insurance has grown four times faster than wages and five times faster than income since 2010 (Source). The growth of high deductible health plans (HDHPs) underscores this shift in employees assuming a higher share of the cost of healthcare.
Patients Bear the Brunt of Increasing Healthcare Costs
In 2007, high-deductible health plans (HDHP) accounted for 5% of all employer-based plans, but by 2013 the number had jumped to 20% (Source). In 2020, nearly 53% of American workers covered by private health insurance through their employer were enrolled in a HDHP (Source). Americans now pay more out of their own pockets annually for healthcare than ever before—with maximum out-of-pockets up to $8,700 for an individual or $17,400 for a family (note that maximum out-of-pockets for HDHPs are slightly lower); the rates for 2023 have already been set to increase by 4.6% (Source, Source). Similarly, for Part D, there is currently no cap on out-of-pocket costs that Medicare beneficiaries have to pay for covered prescription drugs (Source).
As costs of healthcare continue to shift from employers to employees, the distribution of these costs by type and site of care are also evolving. While inpatient hospital stays have historically been the most expensive component of healthcare, prescription drug spending continues to grow as a share of total healthcare costs. The Office of the Actuary at CMS projects that drugs billed under the pharmacy benefit will grow faster than other areas of spending over the next decade, driven in large part by changes in utilization, the introduction of new drugs, and increases in the unit cost or cost per dosage of pharmaceuticals (Source). Spending on drugs billed under the medical benefit are projected to grow at an accelerated pace – driven in large part by greater access to and adoption of targeted therapies, such as cell and gene therapies.
Prescription drugs, billed under either the pharmacy benefit or the medical benefit, are estimated to account for approximately 15% of overall healthcare costs (Source). In 2018, the U.S. spent $3.6 trillion on national health expenditures, of which $335 billion—nearly 10%—was spent on prescription drugs billed under the pharmacy benefit (Source). This metric inherently understates the percent of healthcare costs attributable to drugs, as it does not include drugs billed under the medical benefit which are estimated to represent 35% of specialty medications. (Source).
Healthcare cost increases have been occurring for decades, shifting the burden of cost share from employer to employee. The principal challenge that presents is centered around the stagnation of real wage growth for households in the U.S. The annual growth in healthcare premiums is currently outpacing the growth in U.S. household wages. From 2009 to 2019, average healthcare premium increases outstripped those of average weekly earnings by nearly 8-fold, from $13,375 to $20,576—nearly a 54% increase—versus an increase of only 6.9% in average weekly earnings (Source, Source). If we were to assume an average annual insurance premium of $21,000, premiums consume 100% of income for more than 13% of Americans, and consume at least 33% of wage income for more than 50% of Americans (Source). Employees and employers are being increasingly burdened with supporting an increasingly expensive healthcare system, with no end—or solution—in sight.
In response to these rising healthcare costs, employers continue the shift of increasing the cost burden on patients. As a result, the need to bring the cost of healthcare in-line with what Americans can afford is greater than ever.
As costs continue to strain the U.S. healthcare market at an increasing rate, there is pressure for market stakeholders to contain these costs. Outside of governmental controls, an obvious source of cost containment comes from payers, who serve to balance health care services utilized with their associated benefits and cost structures. An increasing swell in services and drug costs without direct offsets to other healthcare expenses (e.g., hospitalizations) will likely cause payers to eventually increase limitations placed on the services and products utilized.
But the bigger question is, how are payers likely to evolve? With the promise of continued growth, we anticipate that payers will continue to increase their scrutiny of drugs and implement new and/or more stringent utilization management controls on products that have a perceptibly disproportionate budget impact—including leveraging payer management tools against previously untouched therapeutic classes, such as oncology. Patients will depend on drastic changes to improve the sustainability of the current healthcare ecosystem, and payers are a crucial stakeholder for this to become a reality.
Sustainability is an auspicious goal in healthcare and will be driven by three main contributors: regulation and legislation, industry standards, and social pressure. Industry standards have proven unable to drive sustainability in healthcare alone as stakeholder priorities align to profits and often undermine the perspective of the patients. We foresee a coupling across these three pillars as imperative to driving change. When regulations, legislation, and social pressure bend the will of healthcare stakeholders and health plan organizations, industry standards will begin to shift and create relief for the ever-increasing patient burden.
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