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Health Spending Growth Ticks Up After Six-Year Lull

By Kerry Young, CQ Roll Call

July 28, 2015 -- The six-year slowdown in medical inflation has ended, federal researchers report. The aging population, stronger economic growth, and a rise in the number of Americans with health insurance is refueling medical cost increases.

But steps taken by insurers and Congress to rein in health care spending likely will temper the rate of growth over the next decade, actuaries, and economists for the Centers for Medicare and Medicaid Services (CMS) said in an annual report on health spending. They predict moderate increases in historical terms, even as baby boomers require more medical care, economic growth continues, and more expensive drugs are expected to reach the market.

National health spending rose 5.5 percent to $3.08 trillion last year over 2013, when it rose 3.6 percent. The pace marks the first time that inflation topped 5 percent since 2007, when the last recession and its lingering effects held annual increases close to historically low rates, the researchers said. Over the next decade, the average annual gain in health spending is expected to be 5.8 percent, with the annual increase predicted to be 6.2 percent in 2024.

Lawmakers are closely watching the pace of growth in health expenses, which are central to debates about the federal budget. The costs of caring for a rising number of older Americans have long been expected to grab an expanding share of government spending, which could then reduce the funds available for other national priorities.

The predicted national increases still lag the average of about 9 percent growth per year in the three decades prior to the last recession, CMS researchers said.

"There are factors that would make it difficult to see that growth come to those high levels of the 1980s and 1990s," Sean Keehan, a CMS economist and lead author of the study published in Health Affairs, said at a press conference.

The CMS report expresses confidence in steps taken in recent years by both public and private insurers to slow medical cost increases, which will still inevitably rise due to the aging of the population and advances in science. Total spending is forecast to hit $5.4 trillion by 2024, which would represent about 20 percent of the nation's economy, or gross domestic product. It now consumes about 18 percent of GDP.

Combined enrollment in Medicare and Medicaid will rise to about 148 million people by 2024, from 119 million beneficiaries this year. Attempts to link Medicare payments to productivity may restrain growth in the federal health program below what it would be otherwise, even with the number of enrollees rising, said the CMS researchers. The number of people covered by private insurance plans will rise from 190.6 million to 208.2 million due in part to coverage expansion in the 2010 health law, the researchers said.

Insurance companies are designing plans to shift more direct costs to consumers, with high-deductible options now accounting for one in five coverage options offered by employers to their workers, the CMS researchers said. "Therefore, even among the privately insured, many consumers are still reporting judicious use of medical care because of cost concerns," they wrote in the paper.

As a result, drugmakers may find it a tougher sell to get costly new medicines approved by health plans, especially when there are cheaper alternatives, CMS researchers said. The uproar seen last year around the introduction of Gilead Sciences Inc.'s hepatitis C pill Sovaldi may prove to be an outlier in a world with less generous insurance.

CMS researchers cited increased competition for hepatitis C drugs as one of the factors expected to slow the gain in national health spending to 5.3 percent this year from the 5.5 percent increase in 2014. Gilead initially marketed its Sovaldi pill, approved by the Food and Drug Administration in late 2013, at a price of $1,000 a pill. That since has been reduced by competition and negotiations.

Total prescription drug spending for the nation rose by 13 percent to $305 billion last year, but is predicted to rise by only 8 percent this year to $328 billion.

CMS researchers noted at the press conference that another drug introduced with an eye-catching price tag may not be covered widely by many insurers. Sanofi SA and partner Regeneron Pharmaceuticals Inc. last week announced the FDA approval of an injectable cholesterol medicine Praluent, which is intended to cost about $40 a day. Many potent generic cholesterol pills cost under $1 a pill, CMS researchers said.

Still, it's not possible to know whether pharmaceutical companies will produce new medicines that will win broad insurance coverage, Keehan said.

"We don't know which drugs will be approved and how effective they will be," Keehan said.  "It certainly is an area of uncertainty."

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