Anecdotal evidence has been coagulating into numbers, and these numbers are now beginning to weigh down corporate earnings calls. It appears the toughest creature out there, the one that no one has been able to subdue yet, the ever wily and inexplicable American consumer, is having second thoughts about prescription drugs. And is fighting back. A paradigm shift.
We’ve already heard from some companies, such as drug maker Pfizer, whose revenues in the US plunged 18%, largely due to the collapse of its flagship drug Lipitor that is losing its battle with much cheaper generics. But the direst indications came from Express Scripts, the largest pharmacy benefit manager in the US—and perhaps one of the best gauges of spending patterns for prescription drugs.
During the earnings call, CEO George Paz, who ominously was “not prepared to provide 2013 guidance,” embarked on a dark speech. The company’s clients had “unprecedented concerns about our country’s economic outlook,” he said. Unprecedented concerns! So even worse than 2008-2009. He went on:
Our health claim clients are expecting membership reductions in 2013. Large employers have pulled back on hiring plans, using contractors and part-time employees when necessary. Mid to small employers are cutting back or postponing health care coverage decisions while waiting for more clarity on Health Care Reform. And we continue to see low rates of drug utilization as individuals deal with uncertainty at the household level.
He lamented “the current weak business climate and the unemployment outlook” and was worried about the “challenging macroeconomic environment.” Shorts must have felt a certain frisson. Remains to be seen whether the dive that Express Scripts shares performed is a buying opportunity that will add to a cushy retirement or one that will slice off your fingers.
But beyond the company’s fate, he’d pointed at what ails the US economy, including a shift to part-time workers and contractors often without healthcare benefits, and smaller employers who, in their struggle to survive, are cutting back on healthcare benefits. As these workers—the inexplicable American consumers—are left to their own devices, they have to make their own decisions about what prescription drugs, if any, to blow their scarce money on.
Express Scripts has seen this trend in another area. Its Drug Trend Report, which dissected prescription drugs sold to its members in 2010 and 2011, sketched the beginnings of the paradigm shift: in 2011, specialty drugs sales increased 17.1%, down from a 19.6% increase in 2010; traditional drugs only eked out a gain of 0.1%, the lowest increase since it began tracking the data; and spending on all prescription drugs combined rose only 2.7%, also a record low. That was for 2011.
But the report didn’t include insights into the buying behavior of the 48.6 million uninsured Americans who’re even more reluctant to spend money they don’t have on prescription drugs they can live without. And it didn’t include the trends of 2012, which as Paz phrased it, are cause for “unprecedented concerns.”
Whatever the reasons, whether prescribing behavior by doctors or buying behavior by consumers, lack of insurance or lack of money, or the growing prevalence of generic alternatives: spending on prescription drugs, long considered recession-proof, seems to have bumped into a wall for the first time ever.
Healthcare costs in the US, around $2.6 trillion a year, or 17.9% of GDP, may be reaching a level beyond which the various players in the economy cannot go, or refuse to go, a market-based barrier of sorts. And the inexplicable American consumer may be on the forefront—not only those who don’t have insurance, but also those who have high-deductible plans.
In 2012, plans with deductibles of $1,000 or more made up 19% of employee-sponsored health plans. Families covered by such plans, for better or worse, are cutting back medical spending … by 14%, according to a study last year. They’re making medical decisions where at least one part of the equation is their own money. And they’re accomplishing what no one has been able to accomplish so far, namely taming the untamable healthcare expense monster.
That the US has too much debt is no longer a controversial statement. Some may believe other problems are more urgent, or that we need to grow our way out rather than slash spending. But the debt-to-GDP ratio must decrease if we are to have a stable, prosperous economy. Read…One Chart Explains Why Government Debt Is Dragging on the Economy.
Wolf Richter for Zero Hedge