What do you get when you combine Obamacare with an expected explosion in the use of pricey drugs and the rapid aging of the Baby Boomer population? The answer, courtesy of the Centers for Medicare & Medicaid Services (CMS) today: national health expenditures that are projected to grow an average of 5.8% a year for the next decade, rising to $5.4 trillion by 2024—substantially slower than the 9% average growth seen before 2008, but much faster than the 4% growth since then. At the same time, gross domestic product (GDP) growth is projected to average 4.7% over that period, meaning health spending will account for 19.6% of the economy in 2024, up from 17.4% in 2013.
The CMS projections, published today by the journal Health Affairs, paint a picture of a health care system under tremendous cost pressure that shows no signs of letting up anytime soon. Not surprisingly, a lot of the added expense is coming from prescription drugs.
Take 2014, for example. National health spending grew 5.5% to $3.1 trillion last year, part of which was attributable to the expansion of health insurance coverage under the Affordable Care Act (ACA). But the CMS authors point out that growth in prescription drug spending exploded from 2.5% in 2013 to 12.6% last year.
The main culprit, they say, was the entry into the market of expensive new hepatitis C drugs. They included Gilead Sciences GILD +4.83% Sovaldi, which was initially priced at $84,000 a course. The authors also cited new specialty drugs for cancer and multiple sclerosis as adding to the expense burden.
Concerns about rising drug prices are growing of late, with the FDA approval of a new cholesterol-lowering injection called Praluent from Regeneron Pharmaceuticals REGN +2.17% and Sanofi Sanofi. It is the first in a new class of drugs, known as PCSK9 inhibitors, which is showing great promise for lowering cholesterol in patients who don’t respond to cheap statins like generic Lipitor.
Praluent is hitting the market with a price tag of $14,600 a year. But unlike drugs such as Sovaldi, which cure most patients in a few months, the PCSK9 inhibitors would need to be taken for life—resulting in sky-high costs to the health care system that some insurers have estimated could run as high as $150 billion a year.
Sean Keehan, an economist for CMS and the paper’s lead author, said in a press conference that the agency did take the entry of the PCSK9 inhibitors into account, but it didn’t buy into the multibillion-dollar fears from the insurance industry. “We [predicted] a modest impact on spending because of these drugs, but it’s not as large as I’ve seen in some reports.” he said.
He noted that pricing pressure could very well bring down the overall costs of the PCSK9 inhibitors, as competitors come into the market. Indeed, Amgen AMGN +4.34%’s Repatha is expected to be approved by the FDA soon. “As we saw with the hepatitis C drugs, when there’s a lot of competition, some manufacturers might offer fairly high rebates, so the cost may not be as high as some suspect,” Keehan said.
Then there’s the existence of inexpensive generics. “Our expectation is that employers and pharmacy benefit managers will make sure that their enrollees use those inexpensive version first before they’re approved for the newly approved expensive drug,” Keehan said.
Perhaps, but there are plenty of other drugs in line for approval in other diseases, most notably cancer, and that could lead to health spending that surpasses CMS’s latest projections. The out-of-control prices of new cancer drugs were a major topic of conversation at the recent American Society of Clinical Oncology (ASCO) meeting, where Memorial Sloan Kettering oncologist Leonard Saltz made waves with a number of eye-popping predictions. Among them: If Merck Merck ’s hit immunotherapy drug Keytruda, which is showing promise in a number of cancers, were given at a 10-milligram-per-kilogram dose, it would cost $1 million to treat a 165-pound patient. (A spokeswoman says in an e-mail that while Merck has studied Keytruda at the 10-milligram dose, it is seeking approval in advanced melanoma and non-small cell lung cancer at 2-milligrams-per-kilogram and is studying a comparable dose in other cancers.)
CMS is well aware of the concerns, Keehan said. “We are monitoring the different new drugs to see what impact they may have on spending growth,” he said. He added that CMS predicts that prescription drug expenditures as a share of total national health spending will increase by the end of the decade, but only from 9% in 2013 to 10%—making the category still quite small compared to hospital care and physician services. Still, he conceded, “It’s very difficult to try to project which drugs will be approved and how much their impact on spending will be. It’s the largest area of uncertainty.”
Despite the expected wave of new high-priced drugs, there are some of positive signs in the overall health spending projections. For example, medical price inflation was just 1.4% last year, despite many more covered patients entering the fray. Per-capita premium growth for private health plans is expected be a modest 2.8 percent in 2015 and to stay below 6% for the next decade. And even though overall Medicaid spending rose an estimated 12% in 2014 as a result of a rise in enrollment, per-capita spending declined by a projected 0.8% because of a somewhat healthier patient base.
That’s by no means a guarantee the modest growth trends will continue, asserted CMS Acting Administrator Andy Slavitt in a press release. “We cannot be complacent,” he said. “The task ahead for all of us is to keep people healthier while spending smarter across all categories of care delivery so that we can sustain these results.”
This post has been updated since it was originally posted to include the input from Merck.
Originally posted on: Forbes.com