U.S. health spending increased by 6.9% in 2005; Slowest growth rate since 1999, but twice the rate of inflation, CMS study finds

Jan 09, 2007--U.S. health care spending increased 6.9% in 2005, marking the third consecutive year that the growth rate declined, according to an annual government report published in the January/February issue of Health Affairs, the New York Times reports.

The growth rate was the lowest reported since 1999 (Pear, New York Times, 1/9). The health spending growth rate in 2004 was 7.2% (Alonso-Zaldivar, Los Angeles Times, 1/9).

The report, prepared by the CMS Office of the Actuary, states, "This might be an encouraging sign for the individuals, businesses and governments that finance health care; however, it is unclear whether this ... is temporary or indicative of a long-term trend" (Appleby, USA Today, 1/9).

According to the report, the U.S. spent $1.988 trillion, or $6,697 per person, on health care in 2005. State and federal governments paid about 40% of health care costs, totaling $736.3 billion (Zhang, Wall Street Journal, 1/9).

Though the rate of growth in health spending slowed, it continued to rise more quickly than the economy as a whole, wages, and general inflation (Los Angeles Times, 1/9). Health spending accounted for 16% of the gross domestic product in 2005, up from 15.9% the previous year. Public-sector spending on health care increased 7.8% in 2005, compared with a 7% growth rate for businesses and a 6.2% increase for households, according to the report (Zhang, Wall Street Journal, 1/9).

Prescription Drug Costs
A slowdown in prescription drug spending growth was the largest reason for the lower overall growth rate during 2005, according to the report (Krasner, Boston Globe, 1/9). Spending on prescription drugs increased 5.8% in 2005, marking the first time since 1993 that drug spending grew more slowly than overall health care costs.

The drug spending growth rate has declined each year since 1999, when it peaked at 18.2%. Drug spending totaled $200.7 billion in 2005, representing 10 cents of every dollar spent on health care (New York Times, 1/9).

Health insurers have slowed the growth of drug spending with tiered plans that have patients pay larger copayments for brand-name drugs than generic drugs, the Globe reports. Separate insurance efforts have encouraged the use of less expensive drugs, with more expensive drugs being used only when cheaper products are ineffective (Boston Globe, 1/9).

Medicaid spending on prescription drugs increased 2.8% in 2005, coming after an average annual increase of 15.4% from 1994 through 2004, according to HHS economist Aaron Catlin, the principal author of the report. Catlin said that 42 states had slower Medicaid drug spending increases in 2005 than in 2004 by taking such actions as pooling their buying power, negotiating discounts with manufacturers and increasing the use of generic drugs (New York Times, 1/9).

Other contributing factors to the drug spending slowdown were pharmaceutical companies' decelerated introduction of new drugs, as well as the immediate aftermath of the withdrawal of Vioxx from the market because of safety concerns, the report found. The report does not include data on the Medicare prescription drug benefit, which was implemented in 2006 (Wall Street Journal, 1/9).

Additional Results
The report also contains the following findings:

• Home health care was the fastest-growing spending category in 2005, increasing 11% in 2005 -- the third consecutive year of double-digit growth. Spending on home health care totaled $47.5 billion.
• Spending on hospital care increased 7.9% in 2005, while spending on physicians increased 7% (New York Times, 1/9).
• Health insurance premium rates increased 6.6% in 2005, "continuing a moderating trend seen in the past couple of years," USA Today reports.
• Out-of-pocket expenses for workers increased 5.8% in 2005, up from 5% in 2004 (USA Today, 1/9).

An abstract of the study is available online.

Reaction
Cathy Cowan, an economist who co-wrote the report, said, "To have a slowdown for three straight years is pretty significant." Cowan said a "convergence" of the GDP growth rate and the health care spending growth rate "means that health care costs are not consuming more of the economy" (Boston Globe, 1/9).

Joseph Minarik, an economist and senior vice president of the Committee for Economic Development, said, "I suspect that what we're seeing is something like we observed in the early 1990s, that as costs go up some resistance is being thrown in their path. But the resistance is not a fundamental change, and the fundamentals in the system will continue to push costs higher" (Los Angeles Times, 1/9).

Paul Ginsburg, president of the Center for Studying Health System Change, said the growing economy might lead to larger health spending increases in several years. Ginsburg said, "We have a strong growth in jobs and sharp pay increases. These are conditions that will lead to a cyclically higher rate of spending, say in '08 or '09" (USA Today, 1/9).

Henry Simmons, president of the National Coalition on Health Care, said, "It would be a disaster if people thought these (spending) numbers mean the crisis is over. Even if costs are only going up at 6.9%, that is still two or three times the rate of growth in take-home pay. It is still unsustainable" (Los Angeles Times, 1/9).

A webcast of a panel discussion analyzing the study's findings -- including several members of the CMS National Health Statistics Group and a senior economist at the Agency for Healthcare Research and Quality -- is available online at kaisernetwork.org.