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Jon Gardner, Health Affairs, 301-656-7401, ext. 230


Government Report Ties Spending Growth to Increases in Hospital and
Drug Spending, Accelerated Medicaid Spending, and the Diminishing Effects
Of Managed Care

(Washington, D.C.)—Prompted by rapidly growing Medicaid, hospital, and prescription drug spending, the U.S. health care budget reached $1.4 trillion in 2001, up from $1.3 trillion in 2000. The 8.7 percent rise is the fastest growth in a decade and is another sign of the waning influence of managed care. Increases in hospital spending alone accounted for 30 percent of the increase in total health spending in 2001.

In its annual release on health spending, the federal government says that the economic recession that began in March 2001, and was exacerbated by the September 11 terrorist attacks, produced a "sharp" increase in the health share of the gross domestic product (GDP). The health GDP rose from 13.3 percent in 2000 to 14.1 percent, the largest increase since 1991.

Federal health officials point out that the 0.8 percentage point increase is about four times the average. "Historically, jumps of this size have been closely followed by major initiatives in the private and/or public sector to reduce spending growth. Government and employers are feeling enormous pressure on their ability to finance rapidly rising spending with resources that are growing more slowly," says report co-author Katharine Levit, director of the National Health Statistics Group in the Office of the Actuary at the Centers for Medicare and Medicaid.

The 2001 health spending report, which appears in the January/February 2003 issue of the policy journal Health Affairs, is the federal government's most comprehensive examination of how the U.S. health care budget is faring. The annual report, which was released at a Health Affairs forum in Washington D.C., examines spending in several health sectors, including hospitals, physician services, prescription drugs, nursing homes, and home health care services. It also tracks spending in the Medicare and Medicaid programs as well as in the private sector.

Medicaid Sees Fastest Growth Since 1993

Public funding for health care, principally from Medicare and Medicaid, continued to accelerate in 2001, increasing 9.4 percent, and exceeding private funding growth by 1.2 percentage points. Growth was due to temporary Medicare payment increases to providers, as well as increased Medicaid spending amid a recession.

Medicaid's total budget grew to $224.3 billion in 2001. Program growth accelerated to 10.8 percent in 2001, up two percentage points and the fastest growth since 1993. This does not include the State Children's Health Insurance Program. Growth in Medicaid spending was fueled by an 8.5 percent rise in enrollment that was tied to the recession, state program expansions for uninsured people and relaxed program eligibility standards, and by increased use of so-called Medicaid "loopholes" by states to close funding gaps. Medicaid spending increased at double-digit rates for all services except nursing homes. The program's fastest growing expenditure in 2000 —prescription drugs—decelerated somewhat in 2001 from 20.6 percent to 15.7 percent.

Medicare spending grew to $242 billion in 2001, up 7.8 percent. That's 2.8 percentage points faster than the previous year. The share of Medicare spending attached to managed care plans actually fell in 2001, as some plans withdrew or limited their participation in the program. A 10 percent drop in Medicare managed care enrollment contributed to a drop of 3.8 percent in capitated payments and a rise of 10.3 percent in fee-for-service expenditures.

Meanwhile, private health insurance premiums accelerated for the fourth consecutive year. Premiums rose 10.5 percent in 2001 to reach $496.1 billion, while benefits grew 10.1 percent. Consumer spending accounted for 14 percent of the health care budget or about $205.5 billion in 2001. Out-of-pocket spending increased 5.6 percent, about half that of private health insurance.

Hospitals See Largest Increase In 10 Years

Although prescription drugs were again the fastest growing spending category in 2001, the 8.3 percent increase in hospital spending reflected the fastest growth in a decade for that sector. Hospitals accounted for a little more than $451 billion of the $1.4 trillion pie. The largest contributor to the acceleration in hospital spending was an increase in use of services. Quantity of services used per patient grew 4.2 percent in 2001, up from 2.2 percent in 2000.

The higher use of services fueled a growth in hospital employment. Hospital employment grew 2.3 percent, up from 0.2 percent in 2000. As a result of the tight labor market, average hourly earnings for private hospital workers grew 6.1 percent in 2001, compared to 4.1 percent for all private workers, and up from 3.3 percent in 2000. The 2001 increase in hourly earnings was the largest growth since 1991.

In contrast, nursing homes were one of the slowest growing health care sectors. Spending for freestanding nursing homes rose 5.5 percent to $99 billion in 2001, the second year of accelerated growth after negligible growth in 1999. The 1999 rate was due mostly to the effects of the Balanced Budget Act (BBA), which reduced Medicare payments to nursing homes.

Prescription Drug Spending Still Outpacing Other Sectors

Although moderating slightly, prescription drug spending continues to grow almost twice as fast as all other health services. The pace in prescription drug spending eased to 15.7 percent in 2001, down from 16.4 percent in 2000 and 19.7 percent in 1999. Prescription drugs consumed $140.6 billion of the total health care budget in 2001. Levit and her colleagues say that this moderation in spending growth can be traced in part to a deceleration in the rate of new drug introduction. Other factors that could be contributing to a moderation in spending: rapid adoption of multi-tier co-payment plans, increasing co-payments and other cost control strategies such as generic incentive programs or drug utilization review. Federal officials say these other factors likely contributed to consumer out-of-pocket spending accounting for a greater share of the drug spending increase in 2001 than in prior years.

Other report highlights:

Physician services. Physician and clinical services spending continued to climb in 2001 but federal officials say the growth does not outpace trends in the early 1990s. Spending on physician and other clinical services increased 8.6 percent in 2001, reaching $314 billion. Spending growth is probably due to growth in use of imaging procedures and increased physician visits. The report shows that aggregate work hours in physician's offices grew from 3 percent in 2000 to 4.4 percent in 2001.

Nursing homes. Although nursing home spending was relatively slow in 2001, Medicare payments to nursing homes grew 22.3 percent in 2001, up from 13.4 percent in 2000. The increase was due to legislation passed by Congress that restored $2.6 billion worth of Medicare payments to nursing homes, funds cut via the BBA. Spending by the Medicaid program, the primary payer for nursing home care, grew only 5.3 percent in 2001.

Home Health. After weathering three years of payment reductions, Medicare home health care spending rose 14.4 percent or $1.2 billion. Medicaid home health spending growth doubled from 8.6 percent in 2000 to 17.3 percent. Together, Medicare and Medicaid accounted for 51 percent of total home health spending in 2001.


Levit concludes that historically such large increases in health spending have prompted private or public payers to re-examine spending priorities and initiate changes. The last time such action occurred was in 1992, when managed care plans began to capture increasing shares of the private insurance market and President Clinton unveiled a major health reform initiative. Privately, many employers already have taken pre-emptive actions to shift a portion of rising cost to workers. With Medicaid expenditures climbing at double-digit rates, states are likely to impose even more austere policies to balance their Medicaid budgets, she predicts. As "managed care loosens its grip on spending," Levit says public and private payers will have to find other solutions for tempering growth. Meanwhile, as health costs continue to rise amid slower economic growth, Levit warns that consumers will likely be asked to contribute more toward existing coverage, or their choice of health plans, providers or benefits may be narrowed.

Health Affairs, published by Project HOPE, is a bimonthly multidisciplinary journal devoted to publishing the leading edge in health policy thought and research. Copies of the January/February 2003 issue will be provided free to interested members of the press. Address inquiries to Jon Gardner at Health Affairs at 301-656-7401, ext. 230 or via e-mail, press@healthaffairs.org. Selected articles from the January/February issue are available free on the journal's Web site, www.healthaffairs.org.


©2003 Project HOPE–The People-to-People Health Foundation, Inc.