By Rebecca Adams, CQ HealthBeat Associate Editor

January 7, 2013 -- National health care spending increased 3.9 percent in 2011 over the previous year, the same as in 2010 and up slightly from 3.8 percent in 2009—levels that are the lowest in the 52 years that federal actuaries have tracked such growth rates.

Federal actuaries attributed the moderation in spending increases mostly to the effects of the recent recession.

Spending on medical services as a share of the gross domestic product remained at 17.9 percent, as in the previous two years, according to an annual study published in the journal, Health Affairs.

Overall, health care spending totaled $2.7 trillion in 2011, or $8,680 per person, compared to $8,404 per person in 2010 and $8,149 per person the year before.

Centers for Medicare and Medicaid Services (CMS) Chief Actuary Rick Foster, who is retiring at the end of the month, told reporters last week that the historically low spending growth may not last, but also that it may not climb as dramatically as after previous recessions.

During the economic downturn, many people lost their insurance and jobs, which diminished their ability to pay for medical services. "The recession's impact on insurance enrollment was one of the most influential contributors to the slower growth in national health expenditures," said the report.

Other factors also played a part in 2011. More people were enrolled in consumer-directed health plans, such as health savings accounts, which provided an incentive for people to spend less because of cost-sharing that was often higher than under traditional insurance. The number of workers enrolled in consumer-directed plans has swelled from 8 percent of employees in 2008 to 17 percent in 2011. Such plans are now the second-most-prevalent type of private health insurance, after preferred provider organizations and ahead of health maintenance organizations.

Medicaid spending also fell as federal matching rates declined in June 2011 with the expiration of a temporary increase included in the 2009 stimulus law (PL 111-5).

The study says the health care overhaul had little net effect on growth.

But, as Foster noted, the next few years could be different as coverage broadens. In 2014, roughly 30 million people may gain health care benefits as part of the Medicaid and health insurance exchange expansions included in the health care law (PL 111-148, PL 111-152). The additions in coverage could drive up the use of medical services since uninsured people use fewer services than people with insurance.

"All those reasons would suggest faster growth" in the future, said Foster.

But growth may not quickly return to historic levels, Foster indicated. As recently as 2007, the annual growth rate in overall health care spending was 7.6 percent. One factor is that medical providers may be reluctant to charge prices that rise as significantly as in the past, given a rising national concern over health care spending increases, especially as the government assumes responsibility for covering a growing share of Americans. The share of health care spending paid by the federal government grew from 23 percent of costs in 2007 to 28 percent in 2011. That was partly due to the temporary increase in Medicaid, but the federal government will assume greater responsibility for spending as the health care law is implemented in 2014.

"Providers are getting it," said Foster.

So far, national income and job growth has not taken off as robustly as policymakers would like.

"This fact raises questions about whether the near future will hold the type of rebound in health care spending typically seen a few years after a downturn," said the report.

Impact on Providers and Payers

Beyond the overall numbers, the effect on medical professionals who provide care and on the different programs that pay for it varied.
Spending growth slowed for hospital services while spending on prescription drugs and physician care increased. For the nearly $851 billion spent on hospital care, spending grew by 4.3 percent from 2010 to 2011, while it had grown by 4.9 percent from 2009 to 2010 and by 6.7 percent in the previous yearly comparison.

The number of inpatient days and the number of outpatient visits both rose at slower rates from 2010 to 2011 than in the previous time period. Part of that could be attributed to the reduction in Medicaid growth as states faced tight budgets. Growth in Medicaid spending for hospital care rose by 2.4 percent from 2010 to 2011, compared to 7.6 percent growth the year before.

The $541 billion spent on physician and clinical services was 4.3 percent more than in 2010, a faster increase than the 3.1 percent increase from 2009 to 2010. The increase was driven mostly by a greater use of services, since prices for physician services grew only by 1.4 percent from 2010 to 2011. Clinical services—including family planning clinics, outpatient surgical centers, labs, and outpatient mental health clinics—also shot up by 7.2 percent from 2010 to 2011, which helped push up the growth in the overall category of physician and clinical care.

But higher spending growth on physician and clinical services still has not rebounded to previous levels. From 2002–2008, the average annual growth increase for that type of care was 6.1 percent.

Drug Costs Moderating

Consumers spent $263 billion on prescription drugs in 2011, about 2.9 percent more than in 2010. Over the past few years, patients have faced less dramatic increases in drug spending as more people have turned to generics rather than brand-name medicines and people filled fewer prescriptions. The health care law also reduced Medicare beneficiaries' out-of-pocket spending for drugs by narrowing the so-called doughnut hole that requires seniors to bear more of the costs of drugs, so beneficiaries were able to fill more prescriptions.

Overall spending growth rates in Medicaid were not as high as from 2009 to 2010, but that was not the case for Medicare, private health insurance or out-of-pocket spending. Medicare rose by 6.2 percent from 2010 to 2011, in part because of a one-time boost in skilled nursing facility rates, higher Medicare Advantage spending increases, and more spending for physician care, the study said.

As the economy improved, private health insurance premiums and benefits rose. About 1 million more people were enrolled in private health care plans in 2011, in part because of a provision in the health care law allowing young people up to age 26 to stay on their parents' plans. But those people were younger and healthier than the rest of the population, so spending on benefits per person grew by 3.2 percent from 2010 to 2011, compared to 4.6 percent in the previous annual study period.

Spending on private insurance premiums grew by 3.8 percent on average. The study found that new so-called "medical loss ratio" provisions requiring insurers to spend a certain share of premiums on benefits may have attributed to the relatively slow growth.

Overall government public health spending grew by 0.5 percent, with federal funding declining for the first time since 1960 as an influx of funding to combat influenza ran out.

Health and Human Services Secretary Kathleen Sebelius in a recent blog post lauded the slower-than-usual growth. She noted that growth in total private health insurance premiums remained low in 2011 at 3.8 percent and attributed that to provisions in the health care law, including reviews of proposed rate increases and a requirement that insurers spend at least 80 percent of premiums on health benefits or provide rebates to their customers.

Sebelius also said that states should apply for federal funds to beef up their reviews of proposed rate increases.

America's Health Insurance Plans spokesman Robert Zirkelbach said that the study by the actuaries "provides further evidence that premiums track directly with medical costs, considering there is a 3.8 percent increase in premiums and 3.9 percent increase in costs."

Zirkelbach said, "Health care cost growth being steady is a positive sign but much more does need to be done to make sure this trend continues, particularly as the economy rebounds and as the health care law is implemented next year."

The CMS actuaries will build on the historical analysis that they released last week in the summer, when they issue a projection of future costs. Foster will not be in the actuary's office when that study comes out, but he offered an unscientific projection of his own.

"I think costs will accelerate from where we are," he said. "But I don't think they'll go back to dramatic levels as we have often seen in the past."

• Health Affairs article 

By Rebecca Adams, CQ HealthBeat Associate Editor

January 10, 2013 -- The federal government could save $1 trillion over a decade through a series of actions limiting health care spending, according to a report recently released by a 16-member commission organized by The Commonwealth Fund.

The proposals were released in two reports—a 43-page technical paper that provided specific details for 10 ideas and a separate 42-page report that includes introductory background information and then outlines the 10 recommendations to lower spending growth.

Researcher Stuart Guterman said that he hoped the Congressional Budget Office (CBO) would accept some of the proposals as savings that could be credited toward reducing the deficit.

"There are some things that would directly translate to CBO scores and on others, it would depend on assumptions that the CBO was willing to make on the potential savings for some of these policies," Guterman said on a call with reporters last week.

The group said that the $1.04 trillion in federal savings over the decade they are estimating would include $528 billion from Medicare and $369 billion from Medicaid. State and local governments might save an additional $242 billion, mostly because of slower growth in their share of Medicaid costs.

The proposed policies include replacing the current Medicare physician rate formula with a system that would hold physician payments steady for a decade; reducing administrative costs; and offering a new Medicare integrated benefit plan. It also would expand or modify a number of initiatives that federal officials are already experimenting with, basing those payments more on value rather than volume, including enhanced primary care and bundled payments.

The report comes as Congress is seeking ways to reduce the costs of entitlement programs and the deficit. A wide range of groups are in the midst of producing a crush of recommendations that they hope lawmakers will accept. Last week, UnitedHealth Group released its own report outlining how it believed the federal government could save $542 billion over a decade.

The Commonwealth Fund President David Blumenthal told reporters in a conference call that the "extraordinary measures" lawmakers are considering to stave off sequestration cuts "will create receptivity for improvements in the systems that are not only less painful but potential value-adding." He predicted that Congress will examine the group's work because other ideas will be more painful in comparison.

The cost estimates are ambitious, working off the assumption that all of the policies would be put in place in 2013.

Revamp Medical Practice, Medicare Advantage

The Commonwealth Fund report calls for changes to the medical malpractice system that would "reduce the use of defensive medicine by instituting a process for addressing malpractice claims that rewards the adoption of best practices." It also would repeal the Medicare Advantage quality bonus demonstration; expand competitive bidding for durable medical equipment; change payment rates for clinical laboratory, skilled nursing facility, and home health services; require prior authorization for imaging services; and set lower, Medicaid-level drug rebates for people who are dually eligible for Medicare and Medicaid. The group also would encourage the increased use of generic drugs.

The recommendations also include a plan to better coordinate care for high-cost patients with multiple chronic conditions or disabilities and tighten current medical loss ratio rules that require health insurers to spend at least 80 percent of every premium dollar on benefits.

Under a new version of a Medicare Advantage-type plan that the group would create, beneficiaries would get an integrated set of benefits that would aim to take care of patients' medical care and prescription drug needs, including care that is now covered by Medicare supplemental insurance plans. Cathy Schoen, Commonwealth Fund senior vice president and the lead author of the report, described the plan as a generous one, with catastrophic coverage and nominal cost-sharing for recommended primary care. Patients would get incentives to register with a primary care practice to oversee their care, and providers would be required to give patients information about a range of treatment alternatives, including low-cost options, or face payment cuts.

The proposal would call on Congress to set a goal of capping spending at the level that per capita gross domestic product grows over five-year periods, but does not include recommendations on how to enforce such a target.

The Commonwealth Fund contracted with Actuarial Research Corporation to estimate the potential 10-year impact from 2014 through 2023.

• Report

By John Reichard, CQ HealthBeat Editor

January 9, 2013 -- Americans die sooner and have higher rates of disease and injury than citizens of many other high-income countries, a new Institute of Medicine (IOM) report says.

The authors also warned that the findings suggest that the U.S. health system, already the most costly in the world, is on track to becoming even more expensive.

"The fact that we have a generation of children who are in worse health than children elsewhere means that tomorrow's adults will be bringing more demands on the health care system," said Steven H. Woolf, chair of the IOM panel that wrote the report. "That will take a system that's already unaffordable and make it even more costly."

While the report lacked specific recommendations for lawmakers, Woolf emphasized that Congress needs to be aware that the findings will affect the nation's economic performance. That's not only because of rising health costs but because poorer health points to a less productive work force, he said.

"Often politicians can be found boasting about us having a ... health system that is the best in the world, and we do have a lot of strengths in our health care system that we can be proud of," Woolf said. "But it's important for our policy-makers to have knowledge of the scope of this problem."

Woolf is a professor of family medicine at Virginia Commonwealth University in Richmond.

The study said that compared to 16 peer nations, the U.S. is at or near the bottom in nine major areas of health: infant mortality and low birth weight; injuries and homicides; teenage pregnancies and sexually transmitted infections; prevalence of HIV and AIDS; drug-related deaths; obesity and diabetes; heart disease; chronic lung disease; and disability.

The U.S. outperformed its peers in some areas: Americans over age 75 live longer; Americans have lower death rates from stroke and cancer; they have better control of cholesterol and blood pressure levels; and they have lower rates of smoking.

Broad Range of Problems

The institute billed the study as the first comprehensive look at multiple diseases, injuries, and behaviors across the entire life span, comparing the U.S. with peer nations.

"I personally was stunned by what the disadvantage was across so many topic areas," Woolf said. This suggests "something fundamentally is going wrong."

The report said Americans are more likely to engage in certain unhealthy behaviors. These include heavy intake of calories and behaviors that increase the risk of fatal injuries. Also, it said that the U.S. has relatively high poverty rates. And it has higher rates of income equality and lags behind other nations in educating young people.

But "the problem is not simply a matter of a large uninsured population or even of social and economic disadvantage," the report said. "It cannot be explained away by the racial and ethnic diversity of the U.S. population. The report shows that even relatively well-off Americans who do not smoke and are not overweight may experience inferior health in comparison with their counterparts in other wealthy countries."

During a telephone news briefing, the report's authors were asked to explain why foreign leaders fly to the U.S. for health care when they become seriously ill yet the report shows Americans at a health disadvantage.

"Health is determined by much more than health care," replied Woolf. "Our health as Americans is only partly aided by having a very good health system." He added that "it might be true that the Mayo Clinic and the other systems where the VIPs of the world go for health care offer excellent care, but the average American is not necessarily getting care in that setting."

• IOM Report

By John Reichard, CQ HealthBeat Editor

January 10, 2013 -- In what could give new leverage to those who want to avoid deep Medicare cuts as part of any deficit package later this year, the Obama administration released a report last week showing that per capita spending growth in the program increased by just 0.4 percent in fiscal 2012.

The increase comes after modest, but considerably larger, per capita growth of 3.6 percent in fiscal 2011 and 1.8 percent in fiscal 2010.

The slow per capita growth in 2010-2012, combined with government projections that Medicare spending for 2012-2022 will only grow at the rate the gross domestic product increases, "is unprecedented in the history of the Medicare program," said the report by Richard Kronick and Rosa Po of the Department of Health and Human Services (HHS) Office of the Assistant Secretary for Planning and Evaluation.

"If sustained, the slower growth would improve Medicare's ability to meet its commitments to seniors and persons with disabilities in future generations," the report said.

But administration officials did not respond to requests seeking the 2012 percentage increase in overall Medicare spending. And that's something that critics of the report say means more than per capita spending.

"This is amazing," a Democratic congressional aide said of the per capita number. "For the most part this is not recession. Medicare recipients are for the most part elderly and therefore somewhat immune to job losses. I think this is very much ACA [Affordable Care Act] and providers getting the message."

Democrats hope that tighter provider reimbursement under the health care overhaul law (PL 111-148, PL 111-152) will lead hospitals and other providers to reduce their own costs.

"It should imply that we should build on ACA-related policies and do not need structural reform—like premium support and vouchers and more beneficiary cost-sharing or premium increases," the aide added.

Former Centers for Medicare and Medicaid Services (CMS) Administrator Tom Scully said the modest increase isn't surprising.

Scully said the health law tightened reimbursement for private health plans in Medicare, whose membership now makes up one quarter of the Medicare program. Those plans are responding by driving down expenses, he said.

A second likely factor according to Scully was the recession, contrary to the view of the Democratic aide. He said fewer people in the Medicare fee-for-service program can afford supplemental Medigap coverage in a down economy and so are less likely to obtain health care services.

Scully, who ran CMS during the George W. Bush administration, downplayed the chances the findings would lead to less pressure for cuts in Medicare entitlement spending. "I think you're still going to want to reduce the baseline," he said.

Kronick and Po said the health care law was an important factor in slowing Medicare per capita spending growth. "The Affordable Care Act restrains the rate of growth of payments to Medicare Advantage plans, restrains the rate of growth in unit payments to hospitals and other providers, promotes value-based payment systems, and makes major investments to reduce fraud and abuse," they said.

The authors of the report added that "the aging of the U.S. population will put a strain on the financing of the Medicare program. Although spending per beneficiary is projected to grow at or below the rate of GDP per capita, the number of Medicare beneficiaries is projected to increase by approximately 3 percent annually. As a result, aggregate Medicare spending will account for a growing share of GDP over the next decade."

Further reducing per beneficiary cost growth below the increase in the Gross Domestic Product "is an important component of responding to fiscal pressure," Kronick and Po continued. "But recent reductions in the growth of Medicare per beneficiary spending and projections for the next decade offer strong evidence that we have made great progress," they said.

The pair acknowledged that the recession may have played a role in lowering per capita spending increases. They also noted that the entry of baby boomers into the program is bringing down the average age of the Medicare population and—because they are relatively healthy—helping to lower per capita spending increases. But the authors described both the recession and the boomer influx as small contributors to the slowing growth trend.

Analysts on the right pointed to the percentage increase in overall Medicare spending—as distinct from per capita spending increases—as the more significant figure. American Enterprise Institute scholar Joseph Antos said in an email message that "it's not time to declare victory over cost."

Antos suggested that the percentage increase for fiscal 2012 in overall Medicare spending could be considerably higher than the per capita increase.

He said 2011 showed a 3.6 percent growth in per capita spending but a 6.2 percent increase in total Medicare spending. "That is not a trivial difference."

Antos added that "when we say that Medicare spending growth is much slower, we're still talking about very sizeable amounts of additional money being pulled out of other spending priorities. That's a part of the problem that often gets short shrift by health policy commentators." And he noted that while having a younger Medicare population helps hold down per capita increases over the next decade, "the demographics start to work against us" as that population ages and their care costs more.

Former Congressional Budget Office Director Douglas Holtz-Eakin said of the 0.4 percent increase, "that's a very promising number but until I'm convinced that that's a sustained trend that's going to continue over time I wouldn't put too much credence on a single observation."

A former Clinton Administration official at HHS agreed. Emory University professor Kenneth Thorpe said "there's probably really nothing much that's pulled any costs out of the system at all. We...are just paying less on a unit basis for what we pay health care providers. You can generate short term reductions but that's not a sustainable long term strategy."

By Dena Bunis, CQ HealthBeat Managing Editor

January 10, 2013 -- The coordinated care model envisioned in the health care law continues to gain popularity as Health and Human Services officials announced last week that 106 more Medicare accountable care organizations (ACOs) have been formed, bringing to as many as 4 million the number of beneficiaries who will be part of such groups.

The announcement brings the number of ACOs that doctors and health care providers have established since the health law (PL 111-148, PL 111-152) was passed in 2010 to 259. At a forum in November, Centers for Medicare and Medicaid Services (CMS) official Richard Gilifillan had predicted the increase, saying that as many as 300 ACOs could be signed up in this third round of contracts for the so-called shared-savings model.

This effort at providing team-based care sets spending and quality targets. Any savings that result are then split between the federal government and the providers involved in the ACO, as long as the quality goals are also achieved. CMS has established 33 such quality measures on care coordination and patient safety, appropriate use of preventive health services, improved care for at-risk populations, and patient and caregiver experience of care. CMS officials say the federal government could save up to $940 million over four years as a result of this program.

CMS officials also said that applications will be due this summer for the fourth round of contracts for ACOs to participate in the shared savings program beginning in January, 2014.

The newest group of ACOs includes a diverse cross-section of physician practices across the country, CMS officials said in a press release. About half of all Medicare ACOs are physician-led organizations that serve fewer than 10,000 beneficiaries. Approximately 20 percent of these groups include community health centers, rural health centers and critical access hospitals that serve low-income and rural communities.

Included in the 106 new ACO are 15 Advance Payment Model ACOs. These are physician-based or rural providers who would benefit from greater access to capital to invest in staff, electronic health record systems or other infrastructure required to improve care coordination, CMS' release says. Medicare hopes to recoup advance payments over time through future shared savings. Fifteen advanced payment Model ACOs had also been announced during the last round of program contracts.

By Rebecca Adams, CQ HealthBeat Associate Editor

January 7, 2013 -- Health and Human Services Secretary (HHS) Kathleen Sebelius recently called on states to beef up their reviews of proposed insurance rate increases.

As part of a statement on national health expenditures, Sebelius said states should "continue the work to hold insurance companies accountable by reviewing and building the capacity to deny unreasonable health insurance rate increases."

Last week, the New York Times highlighted some proposed double-digit increases in premiums for individual and small-group market customers in states such as California, Florida and Ohio.

The health care law (PL 111-148, PL 111-152) requires insurers to justify in writing any increases of 10 percent or more.

"But there is still more to do," Sebelius wrote.

She noted that the law makes $250 million in grants available to states to bolster their rate review procedures. She said 43 states, the District of Columbia and five territories "have started to put this funding to good use."

The next deadline for state officials to apply for rate review funds is Feb. 1.

"I encourage states to take advantage of this opportunity so we can all work to save consumers money and bring more transparency, competition and accountability to health insurance markets," Sebelius said.

America's Health Insurance Plans spokesman Robert Zirkelbach said in an interview that policymakers "need to look at all of the factors driving up insurance premiums, which are primarily medical costs." He also cited "new benefit mandates that make coverage more expensive and the trend of younger and healthier people forgoing insurance, which drives up premiums for everyone."

Zirkelbach said that "arbitrarily capping premiums puts at risk the coverage that families and employers rely on."