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Report: Health Spending Now 16 Percent of GDP

JANUARY 10, 2006 -- Health care spending growth slowed in 2004 to 7.9 percent, the lowest level of increase in four years, mostly due to a slowdown in the growth of drug spending, federal officials said Tuesday.

For the first time in a decade, drug spending growth slowed to single digits, rising 8.2 percent, or less than half the rate measured just five years earlier, according to the report published Tuesday in the journal Health Affairs.

In 2004, health care spending was $1.9 trillion, or $6,280 per person. The study also shows that U.S. spending on health care now accounts for 16 percent of the gross domestic product, up from 13.8 percent in 1993 and 9.1 percent in 1980.

"The implication is that more of every dollar of output by our country is going to health care," said Cynthia Smith, an economist at the Centers for Medicare and Medicaid Services and lead author of the report.

James A. Klein, president of the American Benefits Council, said the report "underscores the importance for both public and private health care purchasers to step up their efforts to rein in health costs while improving health quality."

Karen Ignagni, president of chief executive officer of America's Health Insurance Plans, said the findings demonstrate "the need for further work in improving the affordability of health care" such as making evidence-based medicine "the gold standard of health care."

Mark Merritt, president of the Pharmaceutical Care Management Association, which represents pharmaceutical benefit managers, or PBMs, said the findings are proof of PBMs' successful efforts over the past decade "to change the way consumers, clinicians, and purchasers think about prescription drugs."

The findings, issued annually by the Centers for Medicare and Medicaid Services' Office of the Actuary, includes data through 2004, the most recent year for which actual numbers are available.

Highlights of the report include:

  • Medicare spending rose 8.9 percent to $309 billion in 2004, up from the 6.6 percent registered in 2003. The growth, the report notes, was fueled by increases in home health and physician spending, as well as by the 2003 Medicare prescription drug law (PL 108-173) that increased payments to rural providers and managed care plans and provided drug spending subsidies for low-income Medicare beneficiaries. The Medicare spending numbers do not include the new Medicare drug benefit which went into effect Jan. 1.
  • Medicaid spending growth slowed to 7.9 percent to $293 billion in 2004, a drop from 8.9 percent and the second straight year of deceleration. The authors attribute the slower growth to states efforts to contain prescription drug spending, including using generics and negotiating higher rebates.
  • Private payers spending growth decelerated to 7.6 percent in 2004, a percentage point slower than 2003 and also slower than public sector growth (8.2 percent) and overall spending growth (7.9 percent).
  • Hospital spending reached $571 billion in 2004, up 8.6 percent from $525 billion the previous year and higher than the average rate of 8.2 percent since 2000. Hospital spending growth now accounts for one-third of all health spending growth, and hospitals account for 30 percent of total health spending.
  • Growth in retail drug sales continued to decelerate in 2004, slowing to 8.2 percent compared with 10.2 percent in 2003 and 14 percent in 2002. Prescription drug spending rose to $188 billion in 2004. The report's authors said this was the first year of single-digit growth in the retail market in 10 years. Rapid growth in the use of lower-priced generic drugs, more use of over-the-counter medications, and a shift toward greater mail-order dispensing all contributed to the trend, the researchers concluded.
  • Payments for physician services rose 9 percent in 2004 to roughly $400 billion, a slight acceleration from the 8.6 percent increase in 2003. Medicare spending for physician services grew 9.9 percent and Medicare spending for physician services grew 11.1 percent in 2004, up from 8.8 percent in 2003, because of increasing volume and intensity of services provided.
  • Home health care spending grew faster in 2004 than any other service category. Public spending rose 17.6 percent for home health services, accounting for 74 percent of such spending.
  • Medicare spending for skilled nursing facilities rose 4.3 percent in 2004. Medicaid is the largest public source of funding for nursing homes and accounts for nearly 40 percent of such spending.

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