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Health Spending Growth Slows -- For Now

By John Reichard, CQ HealthBeat Editor

JANUARY 6, 2009 -- Braked by the smallest increase in prescription drug spending since 1963, health spending in the U.S. grew at the slowest pace in a decade in 2007, rising 6.1 percent in 2007, according to new figures released by the Office of the Actuary at the Centers for Medicare and Medicaid Services.

"We're happy about that," Richard Foster, the head of the office, said at a press briefing Monday. But "I wouldn't expect the good news to continue," he added. Health spending grew at a 6.7 percent rate in 2006.

Foster noted that the 6.1 percent growth rate, although relatively low, still outpaced the nation's economic growth rate of 4.8 percent in 2007. As a result, health care's share of the Gross Domestic Product rose to 16.2 percent in 2007, up from 16 percent in 2006. "So we still have this affordability problem," Foster said. U.S. health spending in 2007 totaled $2.2 trillion, or $7,421 per person.

CMS economists did not tie the spending growth slowdown to the nation's economic woes. They said that the current recession began in Dec. 2007 and so overlapped with the period of the study by only one month. In prior recessions, health care spending held steady while economic growth rates declined, a trend that suggests the current downturn will contribute to sizeable future increase in health care's share of GDP, according to one of the economists.

The most striking finding from the analysis, posted Tuesday by the academic journal Health Affairs, was that retail prescription drug spending grew 4.9 percent in 2007 to $227.5 billion, down from 8.6 percent in 2006. The drug spending slowdown accounted for more than half of the overall slowdown in national health expenditures.

But other types of health outlays grew in 2007 at the same rate or at a faster clip than in 2006. And the more modest increase in drug spending may not last. Foster said it may continue for "a little while," but added that there's a limit to one of the main factors driving down drug spending growth—the rate at which generic drugs are substituted for more costly brand-name drugs.

The substitution rate increased from 63 percent in 2006 to 67 percent in 2007, but at some point that growth rate has to stop, Foster said.

The loss of patent exclusivity for various drugs helped drive the lower drug spending growth rate. In 2006, blockbusters that lost exclusive marketing rights included Flonase, Pravachol, Zocor and Zoloft. The loss of patent exclusivity for other blockbusters in 2007 also contributed to the increased use of generic drugs. They included Norvasc, Ambien, Lotrel, Coreg and Toprol-XL. But expiring patents were only part of the story; the increasing use of lower co-payment charges rewarding the use of generics and discouraging the use of brand-name drugs also was a significant factor.

Slower growth in prescription drug prices also contributed to the slowdown. Prices grew 1.4 percent in 2007, compared to 3.5 percent in 2006. The introduction of generic drug discount programs by large retail chains were one factor in the price moderation, although the rate of brand-name drug price growth fell as well.

"Increased safety concerns for certain prescription drugs in 2007 also likely influenced the drug spending trend, as the Food and Drug Administration issued sixty-eight 'black box' warnings, compared to fifty-eight in 2006 and twenty-one in 2003," the analysis by CMS actuaries in Health Affairs said.

The other main factor causing a slowdown in health spending overall was a decline in the growth of spending to administer Medicare benefits. That type of spending grew 62.5 percent in 2006 with the start of the Medicare prescription drug benefit. In 2007, spending to administer Medicare benefits grew 10.7 percent to $21.6 billion.

In the first part of the 1990s, some analysts attributed a slowdown in health spending growth at the time to industry fears about how a health care overhaul might affect the health care sector. Is the same thing happening now with another health overhaul debate in the offing? "Possibly," Foster said, but added that he wouldn't expect to see such an impact reflected in 2007 data.

No Slowdown in Many Other Sectors

Unlike the drug sector, spending growth for hospital, nursing home and home health services accelerated in 2007. Hospital spending, which accounts for about 30 cents of the U.S. health care dollar, grew 7.3 percent to $697 billion, compared to 6.9 percent in 2006. The gain was driven partly by strong growth in Medicaid spending on hospital care. Hospital price growth, however, moderated from 4.4 percent in 2006 to 3.5 percent in 2007.

Spending on freestanding nursing homes grew 4.8 percent to $131 billion compared to 4.0 percent in 2005. In that sector, price growth increased from 3.0 percent in 2006 to 4.7 percent in 2007. Spending for freestanding home health care services grew 11.3 percent in 2007 compared to 10.3 percent in 2006. Part of the increase stemmed from higher prices but "use and intensity" gains also drove the increase. Shady billing drove some of that increased "use"; Foster said of home health billing that "some of it if not outright fraudulent is abusive and questionable."

On the other hand, spending on physician services slowed, partly because of legislation that took effect in 2007 reducing Medicare payments to doctors for imaging services. The rate of price growth increased for physician services to 3.9 percent in 2007 compared to 1.8 percent in 2006, but not utilization. "This acceleration in price, combined with relatively stable overall spending growth, indicates a sharp decrease in non-price factors such as the use or intensity of services paid for in 2007," the Health Affairs analysis said. “Recent survey data indicate that the number of physician office visits declined from the end of 2006 through 2007."

Medicare and Medicaid Growth Back to Normal

Medicare spending grew 7.2 percent in 2007 to $431 billion, down from the big 18.5 percent increase that occurred in 2006 with the advent of the prescription drug benefit. Medicaid spending rose 6.4 percent to $329 billion following its first-ever decrease in 2006 — 0.7 percent. That drop was attributed to the fact that people eligible for both Medicare and Medicaid were switched to Medicare in 2006 for their drug coverage.

In the traditional part of the Medicare program, spending growth slowed considerably to 3.6 percent in 2007. The figure reflected the growing enrollment in the private plan side of Medicare Advantage (MA). MA spending grew 23 percent in 2007 and this increase accounted for almost 60 percent of the total change in Medicare spending in 2007, "largely because of the shift in enrollment," the Health Affairs analysis said.

Medicare spending for physician and clinical services grew at a slower rate of 4.6 percent in 2007 compared to 6.3 percent in 2006, partly because of reduced payments to doctors for imaging services.

However, Medicare retail prescription drug spending increased at a "robust" rate of 19 percent, in large part reflecting increasing enrollment in plans delivering the drug benefit.

In Medicaid, spending on hospital services grew 8.9 percent in 2007, up from 4.9 percent in 2006. "This acceleration was largely attributable to increases in inpatient and outpatient payments as states provided additional supplemental payments to hospitals," the analysis said. Medicaid spending for dental care jumped, rising 13.9 percent in 2007 compared to an increase of 2.7 percent in 2006. But Medicaid payments to providers are now at risk as states face big shortfalls in their budgets because of recession.

Premium Growth Flat

Private health insurance premiums increased 6 percent, the same rate of increase as in 2006. Benefit payments accounted for 87.8 percent of premiums in 2007. The relatively low rate of premium growth can be explained by fewer small employers offering coverage, a decline in the share of the U.S. population covered by private insurance, and the growing rate of Americans with high-deductible health plans, CMS analysts said.

Out-of-pocket spending rose 5.3 percent in 2007 compared to 3.3 percent in 2006. Consumers had to shell out more for prescription drugs, nursing home services and certain medical supplies.

Champagne Bottles Remain Corked

Emphasizing that 2007 had the lowest rate of overall health spending growth since 1998 creates the wrong picture, Paul Ginsburg, president of the Center for Studying Health System Change, said of the Health Affairs article. That's "a highly misleading headline," he said. "Literally it is the lowest but if you look at the details it's continuing as it has been," he said of the health spending trend.

"If not for this sharp drop in drug spending growth the increase would have been the same," Ginsburg said. While a few more big blockbusters will be coming off patent in the next few years, specialty drugs made by biotech firms will have a bigger and bigger impact on drug spending totals. Twenty percent a year increases in spending on specialty drugs off a bigger and bigger base "is our future," he said. "The insurers don't know what to do about it. It's one of their biggest concerns."

Ginsburg said it's possible that the recession could bring a smaller rate of yearly increase in health spending than the 2007 figure but taxpayers "the picture for consumers and taxpayers is likely dismal" because income and revenues available for health care spending will suffer in a sharp economic downturn.

There was little immediate Capitol Hill reaction to the health spending data, but an aide to Senate Finance Committee Chairman Max Baucus, D-Mont., suggested that it would have no impact on the timing of action on health care. "Health care reform is an absolutely urgent need for America's 46 million uninsured, and for those who are not getting sufficient coverage or value for what they do spend on health insurance," the aide said.

Mark Merritt, president of the Pharmaceutical Care Management Association, said lawmakers have an opportunity to keep a lid on prescription drug spending growth because of the nation's dire economic straits. "This is a unique time in history when policy makers can roll special interests," he said. With a trillion dollar deficit looming "we've got to cut spending," he said.

"Pharmacy benefit managers could provide even greater savings and access if policy makers work to accelerate physician adoption of electronic prescribing, support greater use of mail-service pharmacies in federal programs and empower the FDA to approve follow-on biologics and process applications for traditional generics in a timely manner."

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