Skip to main content

Advanced Search

Advanced Search

Current Filters

Filter your query

Publication Types



Newsletter Article


Sharp Falloff in Drug Spending Growth Reported in 2005

By John Reichard, CQ HealthBeat Editor

January 9, 2007 -- A sharp drop in the growth of prescription drug spending helped keep the rise in overall U.S. health care spending down to 6.9 percent in 2005, federal economists said Monday. That was the lowest rate of increase since 1999 and marked the third consecutive year in which the rate of increase in health care spending declined, researchers said in an analysis published Tuesday in the journal Health Affairs.

But the figures hardly suggest that concerns over rising health care costs are likely to ease. Health care spending consumed an even bigger share of the gross domestic product in 2005—6 percent compared with 15.9 percent in 2004. And per capita health care spending in 2005 averaged $6,697 per person, a figure far higher than that of other industrialized nations, and one that is likely to increase significantly in coming years with the graying of America.

Nevertheless, the latest analysis of health care spending data by economists at the Centers for Medicare and Medicaid Services (CMS) was remarkable, particularly in so far as prescription drug spending was concerned.

That type of outlay grew just 5.8 percent in 2005, down from 8.6 percent in 2004 and 18.2 percent in 1999. The 5.8 percent figure was the lowest rate of increase since 1994 and was the main reason for the 2005 slowdown in overall care spending growth, CMS economist Aaron Catlin told a press briefing Monday. A sharp deceleration in Medicaid drug spending, rising use of generic drugs, and greater use of "tiered" copayments charging higher out-of-pocket costs for more costly drugs were key reasons for the drug spending slowdown, CMS economists said.

The study noted that health care spending often lags economic cycles. When a recession occurs, health care spending doesn't decline in growth right away, and helps temper the recession, the economists said. But as the effects of the recession affect health care institutions as well as the general economy, the rate of health care spending growth begins to cool, they noted.

As a result, rates of health care spending growth and economic growth recently converged, as they often do after recessions. But whether the modest pace of growth will endure is unclear. While it persisted in the mid-1990s after a recession, it's unclear whether it will do so this time, researchers said.

That health care spending growth in 2005 barely outpaced overall economic growth "might be an encouraging sign for the individuals, businesses, and governments that finance health care," the researchers wrote in Health Affairs. "However, it is unclear whether this phenomenon is temporary or indicative of a long-term trend. In the near future, the health economy will continue to be influenced by the emergence of new technology, the aging of the population, changing utilization patterns, and a variety of other factors," they added.

Karen Davis, president of The Commonwealth Fund, said, "While this may seem like good news, any celebration is premature. The U.S. still spends a staggering $6,697 per person per year on health care, more than twice what other industrialized countries spend. And even the slower spending growth of 6.9 percent continues to outpace inflation and growth in wages for the average worker in the United States."

Separately, CMS announced Monday that projected spending on the Medicare prescription drug benefit in Part D of the Medicare program is now 30 percent lower than was originally estimated when the benefit was created in 2003. In part, the lower projections reflected the lower patterns of spending cost growth found in 2005 data.

But CMS said the largest reason for the smaller projection announced Monday was competition among drug plans and significantly lower Part D bids. The latest 10-year projection is $113 billion lower than that issued last summer by federal budgeters. "Of the $113 billion reduction, $96 billion is a direct result of competition and significantly lower Part D bids," CMS said in a press release Monday.

While drug spending growth appears to be cooling, hospital spending grew 7.9 percent in 2005, the average annual rate of growth in that sector in the 2001–2005 period. Spending in the home health sector grew fastest, at a rate of 11.1 percent.

Medicare spending grew 9.3 percent to $342 billion in 2005, while Medicaid outlays rose just 7.2 percent, the fourth straight year in which spending growth slowed in that program. Cost controls for prescription drugs were a particularly strong factor in holding down Medicaid spending increases, analysts said. Because of aggressive cost control, Medicaid drug spending grew just 2.8 percent in 2005, compared with 11.6 percent in 2004.

Premiums charged by insurance plans in the private sector rose 6.6 percent in 2005, down from an increase of 7.9 percent in 2004. The employer share of spending on private health insurance was 74.4 percent, with employees paying the remaining 25.6 percent.

The study found that "rather than increasing employees' share of insurance premiums, employers continue to seek cost savings by increasing the use of coinsurance, adding deductibles and eliminating coverage for specific treatments or prescription drugs." Researchers also reported that the share of household personal income devoted to health care grew from 5.4 percent in 2001 to 6.0 percent in 2005.

Publication Details