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Health Care Spending Growth Rate Remains Low for Third Consecutive Year

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."

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