2024 Report

Medicare and Medicaid Expenditures: Prescription Drugs

Increases in recent prescription drug spending are driven by market incentives to raise drug prices and structural changes to Medicare and Medicaid drug benefits. This deep dive explores approaches to addressing root causes of rising expenditures so payers and patients will have access to quality medications at the lowest reasonable costs.

Overview

The last half-decade has seen huge changes in the provision of healthcare to Americans. Recent developments in the public healthcare landscape from the COVID-19 pandemic, the implementation of new regulations, such as provisions from the Inflation Reduction Act, and societal shifts in the healthcare delivery model toward telehealth and in-home care have all influenced where and how we pay for healthcare.

Medicare and Medicaid health expenditures accounted for about 6.9% of the United States GDP in 2023. The sheer size of these programs translates to market power. According to the American Hospital Association, 96% of US hospitals rely on Medicare and Medicaid to pay for over 50% of their total inpatient days.¹ A financial analysis of the largest seven US health insurers found that three of them (Humana, Centene, and Molina) receive over 85% of their plan revenues from government programs.² With this reliance on government healthcare funding, the healthcare industry is incentivized to build their business models to support Medicare and Medicaid services.

While Rios Partners’ annual Health of Health Index report provides a holistic evaluation of the state of US healthcare through the four pillars – Patient, Payer, Provider, and R&D – this brief highlights trends in Medicare and Medicaid spending that signal shifts in the overall healthcare ecosystem. As the new U.S. administration considers policy changes impacting the provision of Medicare and Medicaid, this brief aims to provide identify spending trends, important policy context, and directional recommendations to respond to observed trends in the following areas:

Prescription drugs: Market incentives to raise drug prices and structural changes to Medicare and Medicaid have resulted in spending growth at twice the rate of overall expenditures.

Medical equipment: An aging US population is receiving more home health care services, driving up demand for at-home medical equipment to manage chronic conditions.

Prescription Drugs

Americans pay more for prescriptions drugs than any of their peers. In 2022, the US paid almost three times as much for prescription drugs as Organisation for Economic Co-operation and Development (OECD) comparison countries.³ This gap is growing, with per unit prices on the top 50 drugs jumping from 5.7 times as much as OECD countries in 2017 to 9.1 times as much in 2022. Prescription drug costs are a top health concern for the American public. 92% of Americans believe it’s important for the new administration to expand drug price negotiations, according to a recent KFF survey.⁴ The Payer pillar highlighted a 2.8% increase in out-of-pocket expenses as well as a 14.7% increase in the number of US adults who are rationing medication due to costs.

Two recent Executive Orders on April 15, 2025 and May 12, 2025 asked CMS officials to evaluate drug pricing for Medicare and Medicaid beneficiaries and inefficiencies in the pharmaceutical supply chain with the goal of reducing drug costs for Americans.⁵^,⁶ Efforts to rein in drug pricing aren’t new. Congress, in conjunction with the Centers for Medicare & Medicaid Services (CMS), has been trying to control government prescription drug spending for decades. The Medicaid Drug Rebate Program (MDRP), adopted in 1990, requires drug manufacturers to pay the government back part of the cost of outpatient drugs in exchange for their drugs’ coverage under Medicaid.⁷ Last year, Section 9816 of the American Rescue Plan Act removed the rebate cap on covered drugs to control what the government pays for brand name drugs whose rebates had already reached 100% of the average manufacturer price.⁸ In addition to incremental changes to the MDRP, the Inflation Reduction Act (IRA) provided Medicare with the ability to directly negotiate drug prices. Also last year, CMS negotiated Maximum Fair Prices (MFPs) for 10 Medicare Part D drugs and estimated that 2023 Medicare spending on these drugs would have decreased by $6 billion had the MFPs been in effect.⁹

By the Numbers

Prescription drug spending has grown at twice the rate of overall spending.

According to the latest National Health Expenditure (NHE) data from the Centers for Medicare & Medicaid Services (CMS), Medicare spent $144.6 billion on prescription drugs in 2023, representing 14% of total Medicare spending while Medicaid spent $51 billion on prescription drugs in 2023, about a 6% share of its total spending. Public payer spending on prescription drugs has grown rapidly over the last 5 years: Medicare and Medicaid expenditures on prescription drugs grew twice as fast as overall spending from 2019 to 2023. In contrast, during the same period, private insurance prescription drug expenditures grew at the same rate as overall spending. This indicates meaningful differences between private and public payer policies on prescription drugs.

*Figure 1. Changes in Medicare and Medicaid Prescription Drug Expenditures Since 2019*

Table 1. 2023 Prescription Drug Spending Changes by Source¹⁰^, ¹¹

Spending Source¹²	Medicare	Medicaid	Private
2023 Overall	$1.03 trillion	$871.7 billion	$1.46 trillion
Change since 2022	4.6%	4.5%	7.9%
Change since 2019	7.2%	18.7%	6.4%
2023 Prescription Drugs¹³	$144.6 billion	$51 billion	$175.5 billion
Change since 2022	8.5%	8%	10.1%
Change since 2019	*15.8%*	*34.8%*	6.5%

Drug Price Drivers

Drug producer prices have increased at three times the rate of inflation.

Market structures have incentivized private drug manufacturers, wholesalers, and pharmacies to raise drug prices. A November 2024 HHS report to Congress highlighted increased manufacturer list drug prices for over 4,200 products in 2022, 46% of which outpaced inflation.¹⁴ Over the last 40 years, the prices producers charge for pharmaceuticals have increased at three times the rate of inflation, with life-saving cardiovascular drugs in 2023 costing 450% of what they cost in 2002.¹⁵

The profits from these transactions are distributed across stakeholders. A 2025 study of provider-administered drugs found that 74% of the net spending retained from drug spending was captured by manufacturers, with providers capturing the majority of the remaining retention (22%).¹⁶

Health insurance plans often institute rebate agreements to claim some of the profits in the pharmaceutical supply chain in exchange for drug coverage on their formularies. This figure from a 2024 GAO report shows how funds flow to get plan members the drugs they are prescribed. ¹⁷

Figure 2. Flow of Funds and Prescription Drugs through the Supply Chain to a Health Plan Member¹⁸

Pharmacy benefit managers (PBMs) sit at the center of the market as price negotiators working on behalf of plan sponsors and collecting partial payments and rebates from manufacturers, pharmacies, and the health plan.

Pharmacy Benefit Manager Incentives

For every $1 increase in drug manufacturer rebates, drug list prices increase by $1.17.

PBMs have attracted a lot of recent attention for their role in the pricing of and access to drugs for Americans. A healthcare innovation of the 1960’s, PBMs were established to regulate the expansion of prescription insurance coverage by designing drug formularies and negotiating prices of drugs with manufacturers, wholesalers, and pharmacies on behalf of insurance plan sponsors.¹⁹ What was originally a cost savings role has warped into an oft-cited cause of drug price inflation. In their November 2024 report to Congress, HHS detailed market incentives for PBMs to drive prescription drug prices higher.²⁰ Two recent interim reports from the Federal Trade Commission (FTC) focused on the impact of vertical integration of PBMS in the prescription drug supply chain on drug prices.²¹^,²²

PBMs make money through their negotiations with drug manufacturers, health insurers, and pharmacies.²³ Many of these agreements result in rebate sharing, where an amount from drug sales are returned to PBMs in exchange for their services. These rebates are often structured as percentages of list prices, which means that the higher the list price, the higher the rebate. In fact, for every $1 increase in drug manufacturer rebates, drug list prices increase by $1.17.²⁴ Since PBMs determine the drug formulary structure for insurance plans, they have clear financial incentives to favor placement of higher priced drugs over cheaper alternatives. A GAO report in 2023 found PBMs received higher rebates for placing manufacturer drugs in lower formulary tiers with fewer competitors, demonstrating the mutual financial benefit of drug coverage negotiations for manufacturers and PBMs.²⁵

Another driver of higher drug prices by PBMs comes from the practice of spread pricing, where prices charged to health plans are greater than the reimbursement sent to the pharmacy. The spread of these prices becomes profit for PBMs. An evaluation of Part D high-utilization generic drugs found 40% of average claim spending went to PBM gross profits.²⁶ CMS is aware of this practice and has required Medicaid and CHIP PBM subcontractors to report spread pricing so they can reduce rebate payments by an equivalent amount.²⁷ As of January 2025, 16 states have prohibited spread pricing, indicating increased awareness of the impacts on Medicaid spending.²⁸ Although no federal ban on spread pricing exists, the bi-partisan sponsored “Protecting Pharmacies in Medicaid Act” introduced in March 2025 by Senator Peter Welch includes a section prohibiting spread pricing to ensure drug payments are passed through to pharmacies.²⁹

Vertical Integration and Consolidation in the Pharmacy Supply Chain

3 PBMs manage 80% of all prescriptions filled.

Through various mergers and consolidations, three PBMs (Caremark Rx, Express Scripts, and Optum Rx) now manage about 80 percent of all prescriptions filled, granting them significant market power to manipulate prices to maximize profits.³⁰ These large PBMs are vertically integrated with insurance plans (Aetna with CVS Caremark, Cigna with Express Scripts, and United Healthcare with Optum Rx), which grants insurers more control over drug formularies while streamlining prescription drug benefit management.³¹ Since Medicare and Medicaid subcontract out to PBMs and partner with private insurers to offer coverage, they cannot take advantage of the administrative benefits of managing all aspects of prescription drug coverage under one roof. While fully integrated healthcare companies absorb the administrative costs since they would be “paying themselves,” Medicare and Medicaid are changed administrative fees for each processed claim, further raising prices for public payers.

While vertical integration increases business efficiency, it also creates structures that limit drug patient options. Insurers and PBMs are owned by healthcare companies that operate specialty and retail pharmacies. As part of negotiations, PBMs often create preferred pharmacy networks that offer patients lower out-of-pocket costs and increased access to drugs when filling at in-network pharmacies. For specialty drugs, some formularies require patients to fill prescriptions at PBM-affiliated pharmacies and, in some cases, require providers administering medications in a clinical setting to order medications through their affiliated pharmacies. This lowers consumer prices of drugs and increases their access to their prescribed medications at preferred locations at the expense of flexibility. Independent or other out-of-network pharmacies are often left out of the loop, not carrying the right medication or offering it at a higher price point.³² This market structure creates downward pressure on reimbursement rates for out-of-network pharmacies to a level that can become unsustainable for smaller, independent pharmacies, effectively eliminating rival pharmacies and patient choice with it.

This level of market coordination has drawn significant scrutiny from government regulators. On November 26, 2024, the FTC filed a suit against PBMs for engaging in harmful artificial price inflation of insulin.³³ A stay order due to FTC vacancies has halted administrative adjudication on this matter, but other offices have moved forward with independent suits. Most recently, the Michigan Department of Attorney General filed a suit against PBMs for engaging in anti-competitive practices that allegedly created pharmacy deserts across the state of Michigan.³⁴ These suits aim to limit the market power of integrated pharmaceutical distribution, which is critical for controlling spending by public plans who cannot integrate.

Supply Chain Disruptions – Drug Shortages

Drug shortages put upward pressure on prices.

Increases in demand for certain drugs, such as diabetes and obesity treatments, along with changes to complex international pharmaceutical supply chains, have put upward pressure on drug prices. See the Health of Health 2024 Securing the US Pharmaceutical Supply Securing the US Pharmaceutical Supply Chain Chain topic deep dive for more information. S and Medicaid have influenced spending as well. Insulin spending caps for Medicare Part D beneficiaries and continuous Medicaid enrollment during the pandemic contributed to recent spending.

Absorbing Higher Prices Through Updated Medicare Benefits

While most prescription drug provisions in the IRA aren’t reflected in expenditure data yet, insulin caps contributed to Medicare 2023 spending.

The IRA includes multiple provisions focused on lowering prescription drug costs for Medicare beneficiaries.³⁵ In 2023, the most recent year of NHE data, Medicare capped out-of-pocket spending for insulin at $35 per month. In 2024, 5% coinsurance was eliminated from Medicare catastrophic coverage. 2025 is the first year with a $2,000 annual out-of-pocket spending cap on covered prescription drugs for Medicare Part D beneficiaries. These changes are expected to drive prescription spending growth for Medicare as it foots the bill for beneficiaries with the highest level of medical needs.³⁶ Looking toward the future, Medicare’s drug price negotiations coming into 2026 and beyond will likely result in decreased revenue from drug manufacturer rebates, although the savings from lowered list prices are expected to save Medicare billions of dollars.

Enrolling More Americans in Health Insurance

Medicaid drug spending per enrollee grew 7.3% from 2019 to 2023.

In response to the COVID-19 pandemic, the Families First Coronavirus Response Act (FFCRA) mandated that state Medicaid agencies had to maintain continuous Medicaid and CHIP enrollment from March 2020 to qualify for temporary Federal Medical Assistance Percentage (FMAP) increases.³⁷ This resulted in large increases in Medicaid enrollment through the delinking of FMAP from continuous enrollment in April 2023. However, even with increased enrollment, drug spending per Medicaid enrollee increased by 7.3% from 2019 to 2023, as shown in Table 2 below. This indicates that external market conditions were responsible for Medicaid spending growth.

Table 2. Medicaid Prescription Drug Expenditures per Enrollee³⁸^, ³⁹^,⁴⁰

Year⁴¹	Medicaid Total Enrollment⁴²	Prescription Drug Expenditures⁴³	Drug Expenditures per Enrollee
2019	74.62 million	$37.8 billion	$507
2023	93.79 million	$51 billion	$544
% Change	25.7%	34.8%	*7.3%*

The Path Forward

President Trump’s April 15 Executive Order aimed at lowering drug prices and multiple active legal battles between the government and pharmacy benefit managers clearly indicate that now is the time to capitalize on momentum to address problems in the prescription drug industry. Many industry experts have written recommendations on how to rein in prescription drug costs. We list several priority recommendations:

Codify patient and pharmacy protections and price transparency: Bi-partisan Senate Bill 927 “Protecting Pharmacies in Medicaid Act” aims to level the negotiating playing field across all 50 states by eliminating spread pricing and requiring all participant pharmacies to submit National Average Drug Acquisition Cost surveys.
Improve the Drug Price Negotiations Program: Responding to Executive Order 14273, modifications to the current Medicare Drug Price Negotiation Program should not delay lower prices for life-saving medications. Reducing the biologics exemption grace period to 9 years will bring it in line with small molecule drugs and eliminate the “pill penalty.” Furthermore, the negotiated Maximum Fair Prices from negotiations currently only apply to Medicare Part D. This means beneficiaries enrolled in Medicare Advantage (Part C) plans that include prescription drug coverage or in state Medicaid will not see the benefits of these drug negotiations. Expanding price negotiations to Medicare Part C and Medicaid can help the government to rein in prescription drug costs while maintaining robust prescription drug coverage through existing MDRP agreements.
Expand standards on formulary design to steer access to lower cost prescription drugs: The most recent proposed rule for CY 2026 included a formulary design requirement with “broad access” to generics and biosimilars for Part D coverage.⁴⁴ Expanding formulary design and tying rules to Part C and state Medicaid program funding will increase the number of Americans whose drug benefits will be improved by such rules.
Reform PBM rebate and pricing models: The strong linkage between manufacturer rebates and drug list prices creates market incentives to increase the price of prescription drugs. Renegotiating rebates with drug manufacturers as service fees that reflect the value of the services PBMs provide will sever the tie between rebates and the price of the drug the manufacturer produces. There is also a lack of transparency in PBM claim value calculations. Publishing PBM calculation methodology for prescription drug claim value to increase market price predictability and improve business transparency.

As a part of Rios Partners’ continued engagement on this topic, we are soliciting perspectives from industry leaders to continue to expose the depth of concern of this topic. If you’d like to share your perspective, email us at healthofhealth@riospartners.com.

Share the Post: