Increases in total national healthcare costs have slowed
along with the rest of the economy, but health spending continues to grow
faster than gross domestic product (GDP). New National Health Expenditure
Accounts (NHEA) data released by the Centers for Medicare & Medicaid Services
(CMS) show that health spending in the United States grew by 4.4% in 2008, and
the portion of GDP devoted to healthcare continues to increase. Meanwhile, the
number of new pharmaceuticals approved by the US Food and Drug Administration
(FDA) remained stable in 2009, and spending on prescription drugs grew at a
reduced pace.

NHEA data on total annual spending include the cost of
public and private health insurance and program administration as well as
investments in healthcare research, infrastructure, and equipment. The findings
were reported by CMS’ Office of the Actuary and published in the health policy
journal Health Affairs [2010;29(1):147-155]. In the report, the economic
recession is defined as having begun in December 2007.

According to CMS, the total sum of health spending in the
United States was $2.3 trillion or $7681 per person in 2008. This was the
slowest rate of growth since CMS started officially tracking expenditures in
1960. Despite slower growth, however, healthcare spending continued to outpace
growth in GDP, which increased by 2.6% in 2008. By 2018, CMS predicts that
national health spending will reach $4.4 trillion and comprise about 20% of
GDP.

In response to CMS’ report, the health insurer trade
association put the findings in the context of healthcare reform efforts that
have dominated the debate on healthcare costs. “The latest national health
expenditure data demonstrate why healthcare reform needs to include a long-term
strategy to reduce the growth of healthcare costs. Healthcare spending
continues to rise faster than the economy as a whole, further straining family
budgets and crowding out of other urgent domestic priorities, such as
education, energy, and the environment,” said Karen Ignagni, president and CEO
of America’s Health Insurance Plans.

The 4.4% growth in 2008 was down from 6.0% in 2007, as
spending slowed for nearly all healthcare goods and services, particularly for
hospitals (4.5% in 2008; 5.9% in 2007). However, health spending as a share of
the nation’s GDP continued to climb, reaching 16.2% in 2008 compared with 15.9%
in 2007. CMS officials said that larger increases in the health spending share
of GDP generally occur during or just after periods of economic recession.

The economic downturn significantly impacted health spending
as more Americans could not afford to spend their limited resources on
healthcare and instead went without care, CMS said in a statement. This led to
slower growth in personal healthcare paid by private sources of funds, which
increased only 2.8% in 2008. The recession also made it difficult for many
Americans to afford private health insurance coverage, leading to lower growth
in private health insurance benefit spending, which slowed to 3.9% in 2008. CMS
further explained that the subset of national spending devoted specifically
toward the purchase of healthcare goods and services, called personal
healthcare spending, increased by 4.6% in 2008.

CMS administrators also used the release of health
expenditure data to stump for reform. “This report contains some welcome news
and yet another warning sign,” said Jonathan Blum, director of CMS’ Center for
Medicare Management. “Healthcare spending as a percentage of GDP is rising at
an unsustainable rate. It is clear that we need health insurance reform now.”

Health spending was also impacted by the American Recovery
and Reinvestment Act of 2009, which provided a temporary 27-month increase in
Federal Medical Assistance Percentages used to determine the federal Medicaid
payments to states. The legislation led to approximately $7 billion of Medicaid
spending shifting from states to the federal government for the last quarter of
2008.

Medicare spending grew 8.6% in 2008 to $469.2 billion,
following growth of 7.1% in 2007. Spending growth for fee-for-service (FFS)
Medicare accelerated to 5.3% in 2008 compared with 3.8% growth in 2007.
Medicare Advantage (MA) spending increased 21.3% in 2008, similar to the 22.1%
growth in 2007, the result of a continued shift in enrollment as beneficiaries
switched from traditional FFS into MA plans. Total Part D spending increased
10.0% to $51.5 billion in 2008.

Private health insurance premiums grew 3.1% in 2008 compared
with 4.4% growth in 2007. And growth in benefit payments by private health
insurance also slowed to 3.9% in 2008 from 4.8% in 2007.

Drug Approvals and Spending

During the first week of 2010, the investment research group
Washington Analysis reported that there were 26 new drugs approved in 2009, up
from 25 in 2008. In keeping with the agency’s recent safety emphasis, the FDA
instructed drug manufacturers to add 31 new or updated boxed warnings to the
prescribing information of marketed products, a decrease from the 56 boxed
warnings issued in 2008.

According to the Pharmaceutical Research and Manufacturers
of America (PhRMA), 1 of every 10,000 potential medicines investigated by
America’s research-based pharmaceutical companies makes it through the research
and development pipeline and is approved for patient use by the FDA. Winning
approval, on average, takes 15 years of research and development and costs more
than $800 million.

In our own review of FDA-approved drug products listed by
month at Drugs@FDA, First Report– Managed Care found that approvals in 2009
included 18 new molecular entities (NMEs), compared with 21 NMEs in 2008. The
number of new formulations (34 in 2009; 33 in 2008) and new combinations (6 in
2009; 6 in 2008) remained steady. The FDA also approved 5 products in 2009 that
had previously been marketed without an FDA approval, up from 1 in 2008.

The CMS report on health expenditures found that retail
prescription drug spending growth decelerated to 3.2% in 2008, consistent with
a slowdown in growth that began in 2000. There was a 2.5% increase in
prescription drug prices in 2008 and a 1.4% increase in 2007. The recession, as
well as other factors including new safety warnings, was reported to have
produced a slight decrease in per capita use of prescription drugs.

A separate report prepared by the Government Accountability
Office (GAO) at the request of members of Congress was released in December
2009 and blamed a market lacking therapeutically equivalent drugs and limited
competition for what it termed “extraordinary price increases” for prescription
drugs in 2009.

GAO defined extraordinary price increases as an increase of
100% or more at a single point in time, and the majority of all extraordinary
price increases were for drugs priced less than $25 per unit. GAO reviewed the
average wholesale price for all brand-name prescription drugs in Thomson
Reuters’ Red Book.

From 2000 to 2008, 416 brand-name drug products had
extraordinary price increases, according to the GAO analysis. The median price
of branded drugs with an extraordinary price increase rose from $1.66 per unit
before the increase to $4.70 per unit after the increase. More than half of the
brand-name drug products that had extraordinary price increases were central
nervous system, anti-infective, and cardiovascular drugs.

Despite drug price increases described by the GAO,
“prescription medicines account for only 10% of healthcare spending—the same as
it was back in 1960,” said Ken Johnson, senior vice president of PhRMA.
“Unfortunately, medicines are always looked at as a cost and never seen as a
savings, even though medicines often reduce unnecessary hospitalizations, help
avoid costly medical procedures, and increase productivity through better
prevention and management of chronic diseases,” he continued.

PhRMA asserts that the GAO report focuses only on a small
number of selected brand medicines rather than the entire prescription drug
market. Mr. Johnson referred to CMS data showing medicines are one of the
slower growing areas of healthcare expenditures. “In fact, according to CMS,
the 3.2% growth in prescription drug spending is the lowest growth rate in 47
years and well below the overall growth rate for healthcare. What’s more,” he
continued, “in over half of the cases, according to GAO investigators, price
increases were attributable to middlemen and appear to have originated from the
company that repackaged the drug rather than the company that manufactured the
drug.”

The PhRMA statement asserted that discovering and developing
new medicines is an inherently risky and expensive business. Companies spend,
on average, 10 to 15 years and $1.2 billion researching and developing an
innovative medicine. And for biologics, companies devote an additional $250
million to $450 million to build specialized research and development
facilities.—Charles Boersig