Life Science Compliance Update

March 20, 2017

2016-2025 Projections of National Health Expenditures Data Released


National health expenditure is expected to grow an average of 5.6% annually from 2016 through 2025, according to a report published by Health Affairs (authored by the Centers for Medicare & Medicaid Services’ (CMS) Office of the Actuary (OACT)).

National health spending growth is projected to outpace projected Gross Domestic Product (GDP) growth by 1.2%. The report also projects that the health share of GDP will rise from 17.8% in 2015 to 19.9% by 2025. Growth in national health expenditures over this period is likely to be largely influenced by faster growth in medical prices, as compared to recent historically low growth.

For 2016, the report notes that total health spending is projected to have reached nearly $3.4 trillion, a 4.8% increase from 2015. The report also found that by 2025, federal, state and local governments are projected to finance roughly 47% of national health spending, a slight increase from 46% in 2015.

“After an anticipated slowdown in health spending growth for 2016, we expect health spending growth to gradually increase as a result of faster projected growth in medical prices that is only partially offset by slower projected growth in the use and intensity of medical goods and services,” says Sean Keehan, the study’s first author. “Irrespective of any changes in law, it is expected that because of continued cost pressures associated with paying for health care, employers, insurers, and other payers will continue to pursue strategies that seek to effectively manage the use and cost of health care goods and services.”  

Additional findings from the report include:

  • Total national health spending growth: Growth is projected to have been 4.8% in 2016, a bit slower than the 5.8% growth in 2015, likely because of slower Medicaid and prescription drug spending growth. In 2017, total health spending is projected to grow by 5.4%, expected to be led by increases in private health insurance spending.
  • Medicare: Medicare spending growth is projected to have been 5.0% in 2016 and is expected to average 7.1% over the full projection period of 2016 through 2025. Faster-than-expected growth after 2016 primarily reflects utilization of Medicare-covered services increasing to approach rates closer to Medicare’s longer historical experience.
  • Private health insurance: Spending growth is projected to have slowed from 7.2% in 2015 to 5.9% in 2016, a trend that is related to slower growth in private health insurance enrollment. Spending growth is projected to increase to 6.5% in 2017, due in part to faster premium growth in Marketplace plans related to previous underpricing of premiums and the end of the temporary risk corridors.
  • Medicaid: Projected spending growth slowed significantly in 2016, down to 3.7%, down from 9.7% in 2015, largely reflecting slower growth in Medicaid enrollment. Spending growth is expected to accelerate and average 5.7% for 2017 through 2025 as projected per-enrollee spending growth rises over that timeframe. The increasingly larger share of the Medicaid population who are aged and disabled and who tend to use more intensive services is likely to drive that impetus.
  • Medical price inflation: Medical prices are expected to increase more rapidly after historically low growth in 2015 of 0.8% to nearly 3% by 2025. This faster projected growth in prices is influenced by an acceleration in both economy-wide prices and medical specific prices and is projected to be partially offset by slowing growth in the use and intensity of medical goods and services.
  • Prescription drug spending:  Drug spending growth is projected to have been 5% in 2016, following growth of 9% in 2015, mainly due to slowing use of expensive drugs that treat Hepatitis C. Growth is projected to average 6.4% each year for 2017 through 2025, likely influenced by higher spending on expensive specialty drugs.
  • Insured Share of the Population: The proportion of the population with health insurance is projected to increase from 90.9% in 2015 to 91.5% in 2025.

March 17, 2017

Op-Ed in The Hill on Allowing Medicare to Directly Negotiate Drug Prices


Dr. Rafael Fonseca, a Chair of the Department of Medicine at the Mayo Clinic in Arizona and Distinguished Mayo Investigator, recently wrote an editorial in The Hill, a Washington, DC, based newspaper focused on politics in Congress.

In the editorial, Dr. Fonseca opined that allowing Medicare to directly negotiate drug prices, as has been advocated by a variety of voices (both in and out of the industry), would actually hurt seniors’ access to new drugs.

Dr. Fonseca uses the Veterans Affairs (VA) as an example of what happens when government programs are allowed to negotiated their own drug prices. Currently, the VA pharmacy benefits program negotiates drug prices and pays far less for drugs than many other providers. In order to contain costs, however, the program does not cover many of the newest, most effective treatments.

According to the editorial, many of those drugs that are not covered are “newly approved drugs with no substitutes available.” According to an August 2016 report by Xcenda consultants, only three of the 25 most innovative drugs were available in the VA drug formulary. Compare that to 11 Medicare Part D plans that covered all 25. The majority of Medicare plans covered 21 of the 25 drugs. 

Dr. Fonseca believes that popularity and the “will” of the public will continue to force through “doing something” on prescription drug prices. He believes that there are “three essential things that we must understand about drug costs and how we can address the challenge,” before taking such a risk:

  1. Innovative treatments are expensive to develop. While the cost of some prescription drugs can be high, consider that it takes an average of more than $2.5 billion to bring a drug to market, according to the Tufts Center for the Study of Drug Development. By allowing the marketing of drugs earlier in the approval process, speeding up approvals for competing compounds, and reducing the costs to bring new treatments to market, the FDA could allow for more price competition without harming innovative and access to effective treatments.
  2. Innovative drugs offset other healthcare costs. Medicine has changed dramatically for the better, and mostly because of the new drugs clinicians have in their toolbox. A 2012 Congressional Budget Office study estimated that for every one percent increase in medication utilization, overall Medicare program costs fell by one-fifth of a percent.

Since 1991, the nation's cancer death rate has dropped by 25 percent, according to a recent report by the American Cancer Society. Some cancers, like chronic myelogenous leukemia, are no longer a death sentence; metastatic melanoma, previously a death sentence, can now sometimes be controlled such as was done for President Carter. Hepatitis C can be cured with a short course of pills; and today the life expectancy of HIV patients is about the same as the general population. It is important to remember that today's drug treatments are, often, enormous advances in disease treatment. 

3. Price controls will kill innovation. The United States is the engine of innovation in healthcare, producing roughly half of the world's new drug treatments in the past decade. But the current proposals could threaten patient access and the development of future treatments. Health care economists John A. Vernon and Joseph A. Golec found that price controls imposed in the EU between 1986 and 2004 not only reduced R&D spending, they also "resulted in about fifty fewer new drugs and about seventeen hundred fewer scientists employed in the EU." Rather than feasting on the goose that lays the golden eggs, we should be looking for ways to grow more geese.


There is no denying that Medicare and other government-funded programs are facing a serious funding crisis and that changes to the programs are long overdue. However, it is important to review history and not make the same mistakes that have already been made in attempting to resolve the issue. Instead, Dr. Fonseca believes that “Medicare beneficiaries should have more freedom to choose the coverage and services that best meet their individual needs and preferences.”

March 14, 2017

CMS Releases Report on Drug Rebates


The Centers for Medicare and Medicaid Services (CMS) has released a new report highlighting the growth in rebates from drug manufacturers to pharmacy benefit managers (PBMs) and insurers. However, the report notes that these rebates don’t necessarily amount to savings for beneficiaries and Medicare. Rebates paid by manufactures are referred to as “Direct and Indirect Remuneration” (DIR) by CMS, and such rebates are allegedly increasingly allowing for private Part D insurers to keep costs down, but are less impactful for keeping beneficiary cost sharing low and for holding down Medicare spending in the catastrophic phase of the benefit.

The report highlights the problem of a pricing scheme where manufacturers introduce drugs at a high list price (“point-of-sale”), with the expectation that the initial price will somehow be negotiated downward, “the cost of rebates and other price concessions received after the point-of-sale, is built into the list price charged at the point-of-sale.” Since beneficiary cost sharing is based on the list price, and because Medicare absorbs most costs in the catastrophic benefit, high list prices contribute to high spending for both beneficiaries and the program.

CMS notes that between 2010 and 2015, total DIR grew roughly twenty-two percent per year, while per-member per-month (PMPM) DIR grew about fourteen percent per year. During the same time period, total Part D gross drug costs grew about twelve percent per year and PMPM Part D gross drug costs grew slightly less than five percent per year.

The report details how the combination of higher drug prices and higher DIR can impact the benefit in the following ways:

Beneficiary Cost-Sharing

CMS believes that DIR may hold down total program expenses (and beneficiary premiums), but it does not reduce the cost of drugs for beneficiaries at the point-of-sale. Generally, this results in higher beneficiary cost-sharing obligations as cost-sharing is often assessed as a percentage of the list price;

Medicare Subsidy Payments

Medicare pays the Part D cost-sharing obligations on behalf of low income beneficiaries that are also eligible for Medicaid, roughly twelve million beneficiaries in 2015. As the burden on beneficiary cost-sharing grows, Medicare’s costs for these beneficiaries also grow. Additionally, CMS states that, “higher beneficiary cost-sharing also results in the quicker progression of Part D enrollees through the Part D drug benefit phases and potentially leads to higher costs in the catastrophic phase, where Medicare liability is generally around eighty percent;”


Plan Liability

As illustrated by Figure 3 in the report, higher levels of DIR also have the impact of moderating the financial liability of Part D plans, which counteracts the overall growth of Part D drug spending. High cost-high DIR arrangements ease the financial burden created by Part D plans by essentially shifting costs to the catastrophic phase of the benefit, where plan liability is limited.


The report more or less implies that rebates contribute to Part D spending growth because the current structure of the Part D benefit incentivizes plans to negotiate high rebates to keep their costs down, which in turn leaves Medicare and its beneficiaries on the hook for high spending due to high drug prices.


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