Health Affairs

Slow Growth in Health Spending and Use of Health Care Goods and Services Continued in 2010, Federal Analysts Say

Health spending grew 3.9 percent in 2010, rising to $2.6 trillion

Bethesda, MD -- An extraordinary slowing of the growth in use of health care goods and services contributed to a second year of slow health spending growth in 2010, federal analysts reported in the January issue of Health Affairs. Persistently high unemployment, a substantial loss of private health insurance coverage, lower median household income, and the burden of increased cost sharing led people to forgo care or seek less expensive treatment options.

As a result, growth in national health spending remained low in 2010, following a similar and historically low rate of growth in 2009, according to analysts at the Centers for Medicare and Medicaid Services (CMS). Health spending grew 3.9 percent, only 0.1 percentage point faster than in 2009. Total health spending for 2010 reached $2.6 trillion, or $8,402 per person.

The rates of health spending growth in 2009 and 2010 marked the two slowest rates in the fifty-one-year history of the National Health Expenditure Accounts. "Even though the recession officially ended in 2009, its impact on the health sector appears to have continued into 2010," according to the article. "[The recession's impact] was a little more dramatic in 2010 because of a large decline in personal health care spending," says CMS economist Anne Martin, the article's lead author. "Medical goods and services are generally viewed as necessities, but the recession led consumers to be a lot more cautious about utilizing them."

Slower growth in spending for hospital services, physician and clinical services, and retail prescription drugs reflected slower growth in the use of these goods and services in 2010. Other contributors to overall low growth included slow growth in private health insurance and out-of-pocket spending, and slower growth in Medicare and Medicaid spending.

The CMS analysts' examination of spending on health care goods and services (such as hospitals, physicians, and retail prescription drugs) and the payers and programs that pay for them (such as private insurance, Medicare, and Medicaid) is part of the federal government's annual snapshot of US health spending trends based on the most current data available.

Federal Share of Health Spending Increased

About 45 percent of the nation's health bill was financed by federal and state and local governments in 2010, up from 41 percent in 2007. The federal government's share increased substantially in the last three years, while the share financed by state and local governments declined. The federal share of health care spending rose to 29 percent in 2010 ($742.7 billion), up from 23 percent in 2007. This was partly because of increasing Medicaid enrollment and enhanced federal matching rates mandated under the American Recovery and Reinvestment Act of 2009. In contrast, state and local governments' share decreased--from 18 percent in 2007 to 16 percent in 2010 ($421.1 billion).

Private Businesses Account for Smaller Share

Private businesses spent $534.5 billion on health care in 2010, or 21 percent of the nation's total health care bill. Their share has gradually decreased since 2001, when it was 25 percent. Employer contributions to private health insurance premiums and payroll tax¬–based employer contributions to the Medicare Hospital Insurance (Part A) Trust Fund saw much slower average annual growth between 2008 and 2010 than between 2000 and 2007 because of job losses due to the recession.

Historically Low Household Share of Health Spending

Households spent $725.5 billion on health in 2010; this amount accounted for 28 percent of national health spending, a historic low. After negligible growth in 2009, household spending grew 2.8 percent in 2010. Individuals' payroll tax contributions, self-employment contributions, and voluntary premiums paid to the Medicare Hospital Insurance Trust Fund increased 3.7 percent in 2010, following a decline of 3.5 percent in 2009. Consumer out-of-pocket payments, which grew just 1.8 percent in 2010, financed about two-fifths of all household spending on health care. Approximately one-third of household spending represented employee contributions to private health insurance premiums, which grew faster in 2010 (2.7 percent) after slow growth in 2009 (1.5 percent).

Although consumer out-of-pocket spending growth accelerated to 1.8 percent in 2010 from 0.2 percent in 2009, it was still slower than an average of 4.8 percent for 2000 through 2008. Faster growth in 2010 partially reflects higher cost-sharing requirements for some employees; consumers' switching to plans with lower premiums and higher deductibles or copayments, or both; and the continued loss of health insurance coverage.

Highlights of Payer Spending Trends:

• Private health insurance. Spending on private health insurance premiums totaled $848.7 billion in 2010 and increased 2.4 percent--a slightly slower rate of growth compared to 2009 when total premiums increased 2.6 percent. Spending on private health insurance benefits totaled $746 billion in 2010 and increased 1.6 percent, the slowest rate of increase in the history of the National Health Expenditure Accounts. For the first time in seven years, growth in total premiums exceeded growth in total benefits. In addition, enrollment in private health insurance plans declined for the third year in a row, falling 1.9 percent in 2010. Per enrollee spending on benefits slowed, in part because of slower growth in elective hospital procedures, slower growth in the number of prescriptions dispensed, and fewer physician office visits.
  
  
• Medicare. Medicare spending reached $524.6 billion in 2010, accounting for 20 percent of all national health spending. Medicare spending grew more slowly than in 2009 because of a pronounced slowdown in spending for the Medicare Advantage program, which saw downward payment rate adjustments and declines in enrollment. Fee-for-service enrollment increased 1.5 percent in 2010, the highest rate of growth since 2004. The number of beneficiaries enrolled in Medicare Advantage plans increased 5.6 percent in 2010 compared to 10.5 percent in 2009. This was the first year of single-digit growth in Medicare Advantage enrollment since 2005. Medicare Advantage spending increased 4.7 percent in 2010, a steep slowdown from growth of 15.6 percent in 2009. For the first time since the inception of Medicare managed care, spending per enrollee declined.
  
  
• Medicaid. Total federal and state Medicaid spending accounted for 15 percent of the national health care bill in 2010, reaching $401.4 billion. In 2010, spending grew 7.2 percent, compared to growth of 8.9 percent in 2009. In addition to slower enrollment growth, many states implemented provider rate cuts and freezes in 2010 that helped dampen spending growth. Medicaid spending growth slowed in 2010 for all service categories except hospital care, which grew 11.2 percent. Due to a $41 billion infusion of federal aid, the federal share of Medicaid increased 8.9 percent in 2010, more than twice the 3.9 percent rise for the states.
  

Health Sector Spending Highlights:

• Hospital spending. Spending on hospital care reached $814.0 billion in 2010 and grew 4.9 percent--a slowdown from growth of 6.4 percent in 2009. The slower rate of growth in hospital spending was caused, in part, by consumers postponing medical care, as evident in a decline in median inpatient hospital admissions and slower growth in emergency department visits, outpatient visits, and outpatient surgeries. The deceleration of 1.5 percentage points in the hospital spending growth rate from 2009 marked the fourth consecutive year of relatively slow growth. Private health insurance spending for hospital services--at 35 percent, the largest share of hospital spending--decelerated from growth of 4.8 percent in 2009 to 2.2 percent in 2010. Although Medicare hospital spending grew more slowly in 2010 than in 2009, Medicaid spending on hospital care grew 11.2 percent, compared to 10.4 percent in 2009.
  
  
• Physician and clinical services. Spending for physician and clinical services reached $515.5 billion in 2010. But that spending grew at a historically low rate: 2.5 percent, down from 3.3 percent in 2009. Although price growth remained stable, growth in use and intensity declined, driven by a drop in physician visits because some people deferred going to the doctor to reduce expenses and because the flu season wasn't as bad as in 2009. Since 2005, spending growth for clinical services has outpaced growth for physician services. As a result, clinical services have made up a larger and larger share of total physician and clinical expenditures, rising from 17 percent in 2005 to 19 percent in 2010.
  
  
• Retail prescription drugs. Spending on retail prescription drugs reached $259.1 billion in 2010 and grew only 1.2 percent, a historically low rate of growth. This was driven by slower growth in the volume of drugs consumers purchased, a continuing increase in the use of generics, the loss of patent protection for certain brand-name drugs, fewer new drug introductions than in previous years, and an increase in the Medicaid drug rebates, introduced under the Affordable Care Act. Although Medicaid's share of retail prescription drug spending remained stable at 8 percent in 2010, spending grew more slowly, increasing 0.3 percent after growth of 6.1 percent in 2009. Medicare spending for prescription drugs increased 9.0 percent in 2010 and represented 23 percent of total retail prescription drug spending.
  
  
• Home health care services. Home health care was one of the fastest-growing service sectors in both 2009 and 2010. In 2010, home health spending grew 6.2 percent and reached $70.2 billion, compared to growth of 7.5 percent in 2009. Growth in Medicare and Medicaid home health spending slowed in 2010. Medicare home health spending accounted for 45 percent of total home health spending in 2010, and its growth decelerated from 11.1 percent in 2009 to 5.2 percent, in part because of concentrated efforts to reduce fraudulent billing. These efforts, coupled with a reduction in base episodic rates, contributed to the slowdown.

Health Affairs is the leading journal at the intersection of health, health care, and policy. Published by Project HOPE, the peer-reviewed journal appears each month in print, with additional Web First papers published periodically and health policy briefs published twice monthly at www.healthaffairs.org. Read daily perspectives on Health Affairs Blog. Download weekly Narrative Matters podcasts on iTunes.