Healthcare Spending Hits $2.1Trillion, Growth Rate Grows in 2006, Says CMS

Growth slight but more than economic growth, general inflation

See below: > Healthcare spending by age > Report by KaiserNetwork.org on CMS news and reactions

Jan. 8, 2008 - In 2006, U.S. health care spending reached a total of $2.1 trillion, or $7,026 per person, up from $6,649 per person in 2005, according to a report by the Centers for Medicare & Medicaid Services (CMS). The health care spending growth accelerated slightly in 2006, increasing 6.7 percent compared to 6.5 percent in 2005, which was the slowest rate of growth since 1999.

Health care spending, however, continues to outpace overall economic growth and general inflation, which grew 6.1 percent and 3.2 percent, respectively, in 2006.

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The health spending share of the nation’s Gross Domestic Product (GDP) remained relatively stable in 2006 at 16.0 percent, up by only 0.1 percentage point from 2005. 

“The cost of health care continues to be a real and pressing concern.  Making sure we are paying for high quality health care services, not just the number of services provided, is just one of the most critical issues facing the American public and the federal government now and in the future,” said CMS Acting Administrator Kerry Weems. 

“This review of health care spending reminds us that we need to accelerate our efforts to improve our health care delivery system to make sure that Medicare and Medicaid are sustainable for future generations of beneficiaries and taxpayers."

Out-of-pocket spending grew 3.8 percent in 2006, a deceleration from 5.2 percent growth in 2005.  This slowdown is attributable to the negative growth in out-of-pocket payments for prescription drugs, mainly due to the introduction of the Medicare Part D benefit. 

Out-of-pocket spending accounted for 12 percent of national health spending in 2006; this share has steadily declined since 1998, when it accounted for 15 percent of health spending.  Out-of-pocket spending relative to overall household spending, however, has remained fairly flat since 2003.

Health Affairs Perspective Don’t Break Out The Champagne: Continued Slowing Of Health Care Spending Growth Unlikely To Last By Paul B. Ginsburg Aaron Catlin and colleagues report a fourth year of slowing of the rate of growth of personal health care spending. But many factors indicate that relief for purchasers and consumers will be short-lived. Research on local health care markets suggests that rapid expansion of provider capacity and incentives to increase volume of care are continuing. Increasing incidence of obesity is a major factor behind rising costs. The influence of the economic cycle on health spending, which has lowered the trend in recent years, is likely to reverse its impact shortly. >> Health Affairs: http://www.healthaffairs.org/

Private Spending Growth Slowed in 2006

The CMS found that overall private spending growth slowed in 2006.  Private health insurance premiums grew 5.5 percent in 2006, which was the slowest rate of growth since 1997. 

Benefit payment growth also slowed, from 6.9 percent growth in 2005 to 6.0 percent in 2006.  The slower growth reflects, in part, a decline in private health insurance spending on prescription drugs. 

The ratio of net cost of private health insurance (the difference between premiums and benefits) to total private health insurance premiums was 12.3 percent in 2006, slightly lower than 12.7 percent in 2005. 

At the aggregate level in 2006, businesses (25 percent), households (31 percent), other private sponsors (3 percent), and governments (40 percent) paid for about the same share of health services and supplies as they did in 2005. 

Medicare Drug Program Creates Spending Shift

However, spending shifts did occur within major sponsor categories due to implementation of the Medicare Part D benefit. 

Medicare’s share of federal spending increased from 29 percent in 2005 to 34 percent in 2006, while Medicaid’s share decreased from 45 percent to 40 percent. 

For households, the share of Medicare spending attributable to payroll taxes and premiums increased slightly in response to first-time Medicare Part D premiums.  Conversely, the out-of-pocket spending share decreased slightly due, in part, to the newly available prescription drug coverage through Medicare Part D.

Total Medicaid spending declined for the first time since the program’s inception, falling 0.9 percent in 2006. 

The introduction of Medicare Part D, which shifted drug coverage for dual eligibles from Medicaid into Medicare, contributed to the decline in Medicaid spending growth.  Other reasons for the decline include continued cost containment efforts by states and slower enrollment growth due to more restrictive eligibility criteria and a stronger economy.

Spending growth for most personal health care services slowed in 2006.  Hospital spending, which accounts for 31 percent of total health care spending, grew 7.0 percent in 2006, a decrease of 0.3 percentage points from 2005 and a continued deceleration from 2002 (when growth was 8.2 percent). 

The 2006 growth rate was partially driven by lower utilization of hospital services, especially within Medicare as fee-for-service inpatient hospital admissions declined.

Spending for physician and clinical services also slowed, increasing 5.9 percent in 2006, which is 1.5 percentage points slower than in 2005 and the slowest rate of growth since 1999.  The slowdown was driven by a deceleration in price growth, fueled by a near freeze on Medicare payments to physicians (whose fee schedule update was 0.2 percent in 2006) that influenced private payers as well.

Highlights U.S. Health Spending By Age In November 2007  CMS published “U.S. Health Spending By Age, Selected Years Through 2004”, in Health Affairs as a Web Exclusive. Highlights by age group between 1987 and 2004   ● Per person personal health care spending for the 65 and older population was $14,797 in 2004, which was 5.6 times higher than spending per child ($2,650 in 2004) and 3.3 times spending per working-age person ($4,511 in 2004). The relative gap in per person spending between these three age groups has not changed much since 1987.   ● In 2004, children accounted for 26 percent of the population and 13 percent of PHC spending, while the working-age group, including the baby boomers, comprised the majority of spending and population, at 52 percent and 62 percent respectively.   ● The elderly were the smallest sized group at 12 percent of the population accounting for the remaining 34 percent of spending.   ● Spending trends for children since 1999 have been largely influenced by the SCHIP program. Children’s health care is still primarily paid for by private sources and Medicaid at 59 and 31 percent in 2004, respectively.   ● While prescription drug spending grew fast for all age groups between 1987 and 2004, it disproportionately impacted the working age population, which consisted of the entire baby boom population in 2004. As a result, this cohorts’ share of total prescription drug spending increased from 56 percent in 1987 to 62 percent in 2004.   ● Spending for the oldest old, 85 years and older, relative to spending for all other age groups has decreased from 1987 to 2004, mainly due to a slowdown in nursing home spending. This is the result of an increase in care alternative to nursing home care, such as Medicaid’s home and community-based waivers program.   ● Combining 2004 per capita health care spending levels with the projected future-age-mix reveals minimal effects of aging on overall per person spending, similar to findings in other previous studies.   ● Medicare enrollment growth is anticipated to be a stronger influence on future spending (projected to be 1.6 percent growth per year from 2004-2050) than the changing age-mix of the Medicare population (expected to contribute just 0.1 percent per year).

Spending Growth Slows for Nursing Homes, Home Health Services

In addition, spending growth for both nursing home and home health services slowed.  For freestanding nursing homes, spending grew 3.5 percent in 2006—a deceleration from 4.9 percent in 2005 and the slowest rate of growth since 1999. 

This deceleration is partially attributable to a reduction in nursing home price growth.  Spending growth for freestanding home health care services decelerated from 12.3 percent in 2005 to 9.9 percent in 2006, also partially due to a reduction in price growth.  Despite the 2006 deceleration, home health care continues to be the fastest growing component of all personal health care spending.

Medicare Part D Affected Several Indicators

The implementation of the Medicare Part D prescription drug benefit affected a variety of indicators, including rates of growth of prescription drug spending and the share of drug spending accounted for by Medicare. 

The Medicare Part D benefit contributed to an increase in total Medicare spending, which grew 18.7 percent in 2006 compared to 9.3 percent in 2005.

In addition, Medicare Advantage spending as a share of total Medicare spending increased from 14 percent in 2005 to 18 percent in 2006, in part due to a 25 percent increase in Medicare Advantage enrollment over the same period.  At the same time, traditional fee-for-service enrollment declined 3.8 percent and its share of total Medicare spending fell from 86 to 82 percent.

Prescription drug spending growth accelerated for the first time in six years—from a low of 5.8 percent in 2005 to 8.5 percent in 2006. 

Roughly half of this growth was due to increased use of prescription drugs, partly a result of coverage now available under Medicare Part D, as well as new indications for existing drugs, growth in therapeutic classes, and increased use of specialty drugs.

However, a higher generic dispensing rate in 2006 helped to restrain prescription drug spending growth, which despite the acceleration still remained well below the average annual growth of 13.4 percent per year that occurred between the years 1995 and 2004.  The higher rate of use of generic drugs was driven, in part, by the continued use of tiered co-payment structures, certain drugs going off patent, and the lack of new blockbuster drugs.

Total prescription drug spending in 2006 was $216.7 billion, compared to $199.7 billion in 2005. 

Public funding sources, including Medicare and Medicaid, accounted for 34 percent of total drug spending, whereas in 2005 their share was approximately 28 percent. 

In addition to an increase in the share of prescription drug spending funded by public sources, the implementation of Medicare Part D also shifted Medicaid funding to Medicare for dually eligible individuals. 

Medicare’s share of total prescription drug spending increased from 2 percent in 2005 to 18 percent in 2006. 

Medicaid’s share of total drug spending fell from 19 percent in 2005 to 9 percent in 2006.  Private funding for prescription drugs, including private health insurance and out-of-pocket spending, declined by 1.3 percent from 2005 to 2006; as a result, the private share fell from 72 percent in 2005 to 66 percent in 2006.

These and other findings can be found in a report by CMS’ Office of the Actuary, released today in the health policy journal Health Affairs. 

The health care spending data can be found on the CMS Web site at http://www.cms.hhs.gov/NationalHealthExpendData/01_Overview.asp.