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Health Spending Growth Cools in Many Sectors—For Now

By John Reichard, CQ HealthBeat Editor

January 8, 2008 -- A respected yearly analysis of health care spending data found that 2006 marked the biggest yearly jump in Medicare spending in the past 25 years, with outlays rising 18.7 percent.

Other data in the analysis showed a remarkable moderation of U.S. health spending growth, with Medicaid spending dropping for the first time ever and outlays for physician and clinical services and nursing home care growing at their slowest rate since 1999. Meanwhile, premiums for private health insurance plans grew just 5.5 percent, the smallest rate of increase since 1997.

The data was released Tuesday in a study published in the January/February issue of the academic journal Health Affairs. The Centers for Medicare and Medicaid Services (CMS) analysts briefed reporters on the data Monday.

Prepared by economists in the Office of the Actuary at CMS, the analysis also found that health spending grew only slightly more in 2006—0. 6 percentage points—than the nominal growth in the Gross Domestic Product (GDP). Over the long term, health care spending grows considerably faster than the nominal GDP—2.5 percentage points—the study authors said. Nominal GDP measures the value of goods and services produced in a country based on current prices.

Thus health care's share of the GDP barely increased in 2006, rising 0.1 percentage points to 16 percent of the GDP. Health care spending totaled $2.1 trillion, or $7,026 per person. Overall U.S. health care spending was up 6.7 percent in 2006, slightly faster than the 6.5 percent growth rate in 2005, which showed the slowest yearly growth since 1999.

Medicare spending in 2006 reached $401.3 billion, up from $338 billion in 2005. Much of the increase stemmed from the first full year of the Medicare prescription drug benefit, which accounted for $41 billion in Medicare outlays in 2006. But that figure was lower than the amount Medicare actuaries estimated the drug benefit would cost when the Medicare overhaul law (PL 108-193) was passed in 2003 adding the Part D drug benefit to the program. "It remains the case that Part D is turning out to be less expensive, for the time being, than we originally estimated," CMS Chief Actuary Richard Foster said.

Medicare spending grew just 6 percent in 2006 excluding the costs of prescription drugs and of administrative and insurance costs related to the program. Medicare spending grew at a faster rate—9 percent—in 2005. Spending on the private health plan side of Medicare—the Medicare Advantage program—grew "dramatically," analysts said, reflecting a 25 percent increase in enrollment in Medicare private health plans.

Retail U.S. prescription drug spending rose 8.5 percent in 2006, outpacing growth in other health care sectors. The first full year of the Medicare drug benefit was part of the reason for the considerably faster sales clip—retail U.S. drug spending grew at a slower rate of 5.8 percent in 2005. But the 2006 growth rate was well below the average annual growth rate of 13.4 percent between 1995 and 2004. Various factors fueled the increase in 2006 drug spending, including lower overall rebates and an increase in the use of the drugs with the advent of the Medicare drug benefit. "Growth in use accounted for roughly half of the growth in drug spending in 2006, compared with about 20 percent of growth in 2005," according to the study authors. "Some of this increased use can be attributed to the implementation of the Medicare Part D," they said.

Use also was up in 2006 because of new uses for existing drugs, increased use of specialty drugs to treat cancer and multiple sclerosis, and growth in drug categories such as insomnia drugs, "which experienced faster growth in use than any other class of drugs," the study said.

But increasing use of generics helped restrain prescription drug spending growth in 2006. The rate at which pharmacies dispensed generic drugs climbed to an average of 63 percent in 2006, up from 56 percent in 2005. Tiered co-payments charging lower out-of-pocket costs for generic drugs than for brand-name drugs, a loss of patent protection for certain brand name drugs and a dearth of new blockbuster brand name drugs helped explain the higher use rate for generic drugs.

However, lower rebates in 2006 contributed to the rising rate of prescription drug spending. With the advent of the Medicare drug benefit, seniors dually eligible for both Medicaid and Medicare shifted from Medicaid drug coverage to Medicare drug coverage. Legally mandated Medicaid rebates were considerably larger than the rebates negotiated by Medicare's private plans in 2006, CMS analysts said. Rebates negotiated by Medicare's private plans averaged 5 to 10 percent in 2006 while Medicaid rebates average 30 percent, analysts said.

The analysts said they lacked data to determine whether the shift of the duals from Medicaid to Medicare private plans raised prescription drug spending for the dually eligible. Medicare's share of total U.S. retail prescription drug spending totaled 18 percent in 2006, and government programs overall accounted for 34 percent.

Reporters pressed analysts on whether factors other than lower rebates pointed to higher costs for Medicare with the advent of more private plans in Medicare. For example, overall figures on health spending increases showed an 8.8 percent increase in administrative and net private health insurance costs. That category, which includes private plan profits and administrative costs, among others, rose by only 3.6 percent in 2005 when there were fewer private plans in Medicare. The increase in Medicare private plans in 2006 appeared to explain part of the jump. CMS also said in the briefing that Medicare per capita spending on enrollees in traditional Medicare averaged $9,538 in 2006 compared to $10,133 in Medicare Advantage. But Foster said a variety of factors account for different spending levels in traditional and private plan Medicare. The current level of analysis does not justify a conclusion that private health plans are adding to Medicare's costs, he said.

The study showed that the Medicaid spending actually dropped by 0.9 percent in 2006 to $310.6 billion. The drop largely stemmed from the transfer of drug coverage of the dually eligible from Medicaid to Medicare. Removing drug spending from the analysis, Medicaid spending grew 5.6 percent in 2006, but that growth "still was slow compared with an 8.0 percent increase in 2005," the analysis said. It attributed slower growth in part to "weak" enrollment growth of just 0.2 percent in 2006. That enrollment increase—the smallest since 1998—occurred "primarily because of improved economic conditions and more restrictive eligibility criteria."

Overall, U.S. spending on hospital care grew 7 percent to $648 billion in 2006, a slightly slower growth rate than in 2005. Low growth in the use of services was partly offset by an uptick in hospital price growth of 4.4 percent in 2006. Hospital prices grew 3.8 percent in 2005. Spending for physician and clinical care services grew 5.9 percent to $447.6 billion. Physician prices grew just 1.9 percent in 2006 compared to 3.4 percent in 2005. Slower growth partly stemmed from a Medicare physician payment freeze in 2006. "Private insurers appear to have followed the low Medicare price update in setting prices for privately financed physician services," the study said.

Spending on care in freestanding nursing homes rose 3.5 percent in 2006 to $124.9 billion, partly reflecting more modest nursing home price increases. Spending for home health care grew 9.9 percent to $52.7 billion.

The many indicators of slowing spending growth may not last long, analysts suggested. For example, health care spending tends to increase at rates similar to nominal GDP growth in the few years after a recession, reflecting the longer time it takes for a recession to affect health care, analysts said. But then rates rise considerably faster than nominal GDP growth.

Writing in the same issue of Health Affairs, Paul Ginsburg, president of the Washington, D.C. –based Center for Health System Change, suggested that the cost growth slowdown won't last.

"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," Ginsburg said.

He added that the increasing incidence of obesity is a major factor behind rising health care costs.

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