The high prices of individual medications are the subject of frequent media reports. However, overall national pharmaceutical spending has received somewhat less attention because it is considered less relevant for health care cost containment, as it is dwarfed by national spending on hospital care. This may not be the case for commercial payers. 

We report annual proportions, from January 1, 2011 through December 31, 2016, of total health care spending and per-member-per-month (PMPM) spending on prescription medications for Harvard Pilgrim Health Care (HPHC), a commercial insurer of about one million members in four New England states. Between 2011 and 2016, spending net of rebates by this commercial health plan on outpatient prescription medications, including those administered in physicians’ offices, has increased to a quarter of all health care spending, largely due to increasing prices of specialty medications. 

Our Methods

We analyzed health care spending for all fully insured HPHC members in each of the six study years. Across the years, fully insured members (a little more than 495,000 lives in 2016) constituted between 57 percent and 59 percent of the HPHC membership; for these members, HPHC possesses all claims data. Total health care spending includes spending on inpatient and outpatient care, professional services, and medications. Spending on dental and long-term care, generally not covered by commercial health plans, is not included. Pharmaceutical spending includes spending on prescription medications that are self-administered by patients (reimbursed under the insurer’s pharmacy benefit) and those administered by providers in outpatient settings (reimbursed under the insurer’s medical benefit). Pharmaceutical spending excludes medications administered in inpatient settings. 

We report net health plan pharmaceutical spending. That is, all manufacturer discounts, rebates, and refunds on medication are subtracted from the health plan’s spending amounts. Administrative fees paid per prescription by the health plan to the pharmacy benefit manager are included. Member out-of-pocket spending—which is analyzed separately from plan spending—comprises deductibles, copayments, and coinsurance. PMPM dollar spending values are adjusted for inflation using the Consumer Price Index Medical Care component. 

We present average plan and member spending trends overall for medications reimbursed under the pharmacy and medical benefits; for specialty pharmaceuticals, which include biologics, other highly priced medications, and products that require special handling; for non-specialty medications; and for generics. We also present average specialty medication spending among users of these medications, defined as members who received at least one specialty product in a calendar year. To assess whether change in spending is due to changing utilization volumes, we report average numbers of dispensings PMPM of any medications, of specialty medications, and of specialty medications among users of these products. Finally, we list the 10 products that accounted for the highest pharmacy and medical benefit spending amounts by the plan in 2016 and their net spending values. 

Plan And Member Spending On Pharmaceuticals

From 2011 to 2016, HPHC’s spending on pharmaceuticals increased from 20 percent to 25 percent of total spending on health care and from $81 to $101 PMPM (Exhibit 1).

Exhibit 1: Harvard Pilgrim Health Care Plan And Member Spending, 2011–16

Source: Authors’ analysis of claims for fully insured Harvard Pilgrim Health Care members. Notes: N = 495,206 in 2016. PMPM is per-member-per-month net spending in inflation-adjusted dollars; indicators of significant trend changes from 2001 through 2016, based on time series regression. ** 0.001 ≤ p <0.01 *** p < 0.001 

Since 2014, HPHC medication spending has been higher than inpatient care spending (Exhibit 2).

Exhibit 2: Relative Health Care Spending By Harvard Pilgrim Health Care, By Categories, 2011–16

Source: Authors’ analysis of claims for fully insured Harvard Pilgrim Health Care members. Note: N = 495,206 in 2016.  

In 2016, approximately 75 percent of the plan’s pharmaceutical spending was paid under the pharmacy benefit and 25 percent under the medical benefit (Exhibits 2 and 3). Average health plan PMPM spending increased by 4 percent for nonspecialty medications (rising from $62.52 to $65.01) and by 92 percent for specialty medications (rising from $18.72 to $35.85). For members who received specialty medications, specialty medication spending accounted for 30 percent of total plan health care spending and amounted to an average of $1,092 PMPM for the health plan in 2016 (Exhibit 3).

Exhibit 3: Harvard Pilgrim Health Care Plan And Member Pharmaceutical Spending^a By Spending Category, 2011–16

Source: Authors’ analysis of claims for fully insured Harvard Pilgrim Health Care members. Notes: N = 495,206 in 2016. ^aPharmaceutical spending comprises net spending on medications via the pharmacy and medical benefits, excluding spending on medications administered in inpatient facilities (for example, hospitals, nursing homes, long-term care facilities); ^btotal health care spending comprises spending on inpatient care, outpatient care, professional services, and net spending on medications; ^cPMPM is per member per month net spending in inflation-adjusted dollars; ^dmembers who received at least one specialty product in a calendar year; ^egenerics are multisource products defined as generics in First DataBank’s National Drug File; indicators of significant trend changes from 2001 through 2016, based on time series regression. ^nsp ≥ 0.05 ** 0.001 ≤ p < 0.01 *** p < 0.001 

For members, the share of medication spending decreased from 34 percent to 22 percent of total out-of-pocket health care spending (Exhibit 1). Average out-of-pocket PMPM spending decreased from about $20 to $16 across all medications and from about $10 to $8 for generic products (Exhibit 3). For members receiving specialty medications, inflation-adjusted out-of-pocket specialty medication spending has more than doubled since 2011, to $34 per month in 2016 (Exhibit 3). 

Overall member-level use remained stable at about one dispensing PMPM (not shown), and one specialty medication dispensing per 100 members per month. Members taking specialty medications received between three and four specialty medication dispensings per month. The 10 products that accounted for highest spending amounts under the pharmacy and medical benefits in 2016—ranging from $3 million to $30 million—are indicated for serious chronic conditions (Exhibit 4).

Exhibit 4: Top 10 Products^a Reimbursed By Harvard Pilgrim Health Care, By Value, 2016

Source: Authors’ analysis of claims for fully-insured Harvard Pilgrim Health Care members. Notes: N = 495,206 in 2016. ^aProducts are listed by generic names; ^bin 2016 dollars. 

How Does HPHC’s Pharmaceutical Spending Compare To Others’ Spending?

At 25 percent of total health care expenditures in 2016, net spending on pharmaceuticals by HPHC was consistent with retail pharmaceutical spending proportions of commercial payers across states and considerably higher than 10 percent to 17 percent often reported nationally. Lower reported estimates of pharmaceutical spending may be due to different populations studied (for example, older populations in Medicare plans who use more hospital services) and differences in what is counted (for example, only medications administered by patients themselves, sold in retail setting, and paid under the pharmacy benefit). At HPHC, considering only pharmacy benefit spending would fail to account for the 25 percent of medication spending attributable to those medications administered in physicians’ offices and paid under the health plans’ medical benefit—similar to an estimated national 28 percent spending contribution of non-retail medications. Lower estimates of medication spending proportions may also include in the denominator payments for services not traditionally covered by a commercial insurer (for example, home care). It is noteworthy that our pharmaceutical spending estimates exclude payments for inpatient-administered medications, as those are included in inpatient spending. Consequently, our data understate total pharmaceutical spending. 

Our estimates of declining member out-of-pocket prescription medication spending are consistent with reports on national retail and overall out-of-pocket pharmaceutical spending. Most HPHC members pay fixed dollar copayments per formulary tier, while some pay a capped coinsurance ($250 per prescription); the health plan covers increasingly larger shares of higher-priced pharmaceuticals. 

What Accounts For HPHC’s Increased Pharmaceutical Spending Proportions?

Much of the increase in spending on medications between 2011 and 2016 was attributable to growth in specialty medication spending. Since PMPM medication use remained stable, medication price increases account for the increase in spending, especially for specialty medications. 

Our data span the introduction of highly effective and highly priced (around $95,000 for a 12-week course) new treatments of hepatitis C. Hepatitis C treatments impact payer budgets through the high price of each treatment and the large number of patients needing the medications. Payers have been able to contain to some extent the budget impact of hepatitis C treatments because multiple new medications have created an opportunity for payers to negotiate prices. This is not the case for novel cancer treatments, the most frequent medications among the top 10 medical benefit medications in our study. Anticancer medication launch and post-launch prices are high and increasing at rates higher than inflation. Most recently, two novel therapies have been marketed at $475,000 and $373,000 per one-time treatment for pediatric and adult blood cancers, respectively. 

Implications For HPHC And The Nation

Pharmaceuticals account for substantial and increasing proportions of health care spending by HPHC, even when rebates are taken into account, and we suspect other commercial insurers are experiencing similar trends. There is no agreed-upon benchmark for the proportion of spending allocated to pharmaceuticals, and a high proportion of total spending may be appropriate if allocated to high-value medications that keep patients active, productive, and out of hospitals. Nevertheless, the complex reality is that accelerated approvals and breakthrough designations may lead to marketing, use, and coverage of highly priced medications, especially precision medicines, with uncertain or marginal added value; and rising pharmaceutical spending in the absence of cost offsets will lead to higher premiums and deductibles, higher member cost sharing, or both—all of which threaten affordability of health insurance and health care, decrease equity in access to care, and may harm health. Increasing health care spending in the form of higher premiums is associated with stagnating wages and, on the public side, squeezes out spending on education and other public spending priorities. 

HPHC’s mission is to “improve the quality and value of health care for the people and communities we serve.” To realize this mission, we must ensure that both high-quality care and insurance coverage remain accessible and affordable in our communities. Continuously rising pharmaceutical spending challenges our ability to do so. As our data show, we have so far avoided increases in copayments across our members. We have achieved this through multiple strategies: For therapeutic classes with multiple products that have similar efficacy and safety, we engage in contracts that drive volume against a lower net price. When possible, we use value assessments by organizations such as the Institute for Clinical and Economic Review (ICER) to negotiate “fair market value prices” and avoid the administrative burden of outcomes-based contracts. We have, to date, engaged in 15 outcomes-based risk-sharing agreements with manufacturers and are working with regulatory bodies to seek modifications of Medicaid best pricing regulations, which impede this type of contracting. However, we do not see such contracts alone as the solution to the challenge of increasing pharmaceutical spending; we must also offset other health care spending. Indeed, gene therapeutics have very high product prices and require care that adds substantial non-drug costs. For these and other provider-administered injectable products, we try to engage with manufacturers pre-approval to seek innovative payment models that better reflect the uncertainty and delay of potential therapeutic benefit. 

Nevertheless, the substantial contribution of medications, particularly specialty medications, to total health care spending requires systemwide, coordinated strategies by all stakeholders. Such strategies—including, but not limited to those laid out in the Food and Drug Administration’s Biosimilar Action Plan—must create incentives for the development and licensing of high-value medications and optimize prices, volumes, and choices of pharmaceuticals for high-value, sustainable, and equitable health care for all.