Christopher A. Hopkins, CFA

Christopher A. Hopkins, CFA

Blockbuster weight loss drugs disrupting medical economics

Technological progress can be a two-edged sword. On one hand, productivity improvements have reduced taxing physical labor, increased household wealth, and afforded us more leisure time. On the other hand, as we have become more sedentary, agricultural advances have made food plentiful, contributing to an epidemic of obesity. According to the CDC, just 11% of American adults were obese (BMI over 30) in 1962. Today the number is 42% and over 70% are either obese or overweight, driving billions of dollars in health care expenses each year. More alarmingly, the New England Journal of Medicine projects that 60% of today’s children will be obese by the age of 35.

On yet another hand, scientific advances have brought us closer than ever to a magic bullet for weight loss: a new class of injectable drugs originally developed to treat type II diabetes that are remarkably effective. On the fourth hand, these miracle drugs are incredibly expensive, presenting a formidable obstacle to widespread adoption by those who would benefit the most and posing challenges to insurance companies and Medicare. No wonder Harry Truman yearned for a one-handed economist.

Most Americans are aware of the buzz surrounding these new weight loss medications. Approved in 2017 as a powerful treatment for diabetes, Novo Nordisk’s Ozempic proved to have salutary effects in shedding excess body fat and was approved for weight loss under the name Wegovy in 2021, yielding an average 12% loss of body weight compared with placebo. The active ingredient, semaglutide, replicates a natural hormone that induces insulin secretion that lowers blood glucose levels, slows emptying of the stomach, and inhibits appetite. Last month, US drugmaker Eli Lilly’s diabetes medication Mounjaro (tirzepatide) was approved for weight loss under the name Zepbound and proved even more effective, producing an average loss of 18% of body weight versus placebo.

Heightening the excitement, the 2023 AHA Scientific Sessions concluded with a bang upon the release of clinical trial data showing a 20% reduction in heart attack, stroke, and cardiovascular death in patients taking semaglutide. The exact mechanism for the startling result is yet unknown, but the data got everyone’s attention.

Estimates of the societal costs from obesity vary, but they are astronomical. Researchers at Harvard’s Chan School of Public Health estimate that direct health care costs from obesity in the US total $173 billion annually, or more than $1,860 per person. A Milken Institute study from 2018 presents an even darker picture, suggesting that obesity and overweight conditions in 2016 were responsible for $480 billion in direct health care costs and another $1.24 trillion in lost productivity each year, equal to 9% of total US GDP.

Given the imperative for effective treatment, the question arises: who will pay?

The answer hinges largely on how Medicare proceeds, as private insurers often follow the program’s lead. Medicare is statutorily prohibited from covering and weight loss medication, owing to an outdated perception of obesity as a lifestyle choice rather than a chronic disease, and to several dangerous fad diet drugs that hit the market around the inception of Part D in 2003. But change is afoot, with a bipartisan bill before both houses of Congress called the Treat and Reduce Obesity Act that would eliminate the legal hurdle. While similar bills have languished since 2016, heightened public awareness of these blockbuster treatments will dial up the pressure in 2024. Especially when voters learn that Congress members’ health plans will cover the drugs.

Beyond the legal obstacle lies economic ones. Another New England Journal review estimated that if every eligible Medicare participant was treated chronically with these medications, the additional cost to Medicare Part D would exceed $136 billion annually, roughly 50% of the current total spending for the entire program. In fact, a study by the Institute for Clinical and Economic Review found the cost exceeds the benefit, noting that a more cost-effective solution to the obesity epidemic is “lifestyle modification”. Gee, if only we had known that diet and exercise contribute to weight loss.

These static analyses miss several important factors. Medicare and private insurance cover many health conditions directly resulting from lifestyle choices (lung cancer, motorcycle accidents, HIV). In addition, while the list prices of Wegovy and Zepbound exceed $1,000 per month, the realized cost after manufacturer discounts is around half that. Furthermore, as more new products enter this hot marketplace, competition and efficiency will drive down prices. Meanwhile the drugs will be eligible for price negotiation by Medicare beginning in 2027 and 2031 respectively, so projections must assume lower prices and more options in the out years.

The proximate cost savings from reducing obesity are also difficult to quantify but are certainly substantial. The USC Schaffer Center for Health Policy estimates that Medicare coverage would cut beneficiary obesity in half and produce a direct health care saving of $175 billion over 10 years, and yield a societal benefit of $1 trillion over a decade if all Americans were covered. This number seems low, especially if the Milken estimate of $1.72 trillion in current costs is even in the ballpark. Not to mention the improvement in quality of life for a large share of the US population.

Half of the decline in US mortality from heart disease over the past 50 years has directly resulted from once expensive and now readily available new drugs targeting blood pressure and cholesterol. Tackling the prevalence of obesity is the next frontier.

Share this post