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Health Spending Grows At Slowest Pace In Seven Years;
Health Care Bill Still Reaches $1.7 Trillion

Tighter Medicare, Medicaid Spending Drives 2003 Spending Growth Deceleration


(Bethesda, MD) – The federal government today reported that U.S. health care spending grew at its slowest pace in seven years in 2003, thanks in large part to a pronounced deceleration in what public-sector programs paid for services. Specifically, the Medicaid program became more tight-fisted as a result of state budget stresses and as a federal law that provided supplemental Medicare payments to hospitals and other providers expired, report economists at the Centers for Medicare and Medicaid Services (CMS) in the January/February 2005 issue of Health Affairs.

Read the report at: http://content.healthaffairs.org/cgi/content/abstract/hlthaff.24.1.185.

Despite the slowdown, the U.S. health care bill reached $1.7 trillion, or $5,670 per person in 2003, rising 7.7 percent, a lower growth rate than in 2002 but still faster than economic growth and employee compensation. Growth in health care spending outpaced overall economic growth by nearly three percentage points, and it represented 15.3 percent of the Gross Domestic Product in 2003. In addition, health-spending growth remains faster than the pace recorded in the period between 1993 and 2000, which experienced historically slow growth because of the widespread implementation of managed care.

The report, by economists from the National Health Statistics Group in the CMS Office of the Actuary, examines health spending trends in the public and private sectors. The report is issued annually and provides the most current data on public- and private-sector spending on hospital care, physician care, nursing home care, home health care, pharmaceuticals, and other services.

Although the report offers good news about health care spending, CMS economist and lead author Cynthia Smith says that 2003 was a unique year with an unusual set of circumstances related to the economy, Medicaid, Medicare, and even spending on some prescription drugs. “I don’t think we are going to see a deceleration of this size coming from public programs” in 2004, she says, noting that the 2004 economy was in much better shape than in 2003, reducing the stress on states to rein in their Medicaid spending. Consequently, Smith says that “some of the factors that tempered spending in 2003 are one-time in nature and not expected to recur” in subsequent years.

Medicaid, Medicare Spending Slows

Medicaid saw the most significant changes. Medicaid spending sharply decelerated in 2003 – the first drop in growth since 1997. Spending growth slowed from 12.1 percent in 2002 to 7.1 percent, to reach $267 billion. By tightening eligibility and restricting benefits, states were able to reduce spending on Medicaid, says the CMS. Another factor contributing to the slowdown was a policy that lowered the maximum upper payment limits that Medicaid could pay hospitals and nursing homes for certain services.

In addition, Medicare spending reached $283.1 billion in 2003, an increase of 5.7 percent over 2002 and 4.3 percent per enrollee. This compares to a growth rates of 10.8 percent in 2001 and 7.6 percent in 2002. The slowdown in 2003 was due to the expiration of key provisions of a budget law, which enabled hospitals, nursing homes, and home health agencies to temporarily recoup Medicare payments lost via the Balanced Budget Act.

Private-Sector Spending Stabilizes

Although there was a pronounced deceleration in the growth of public payments for health services, the growth in private-sector spending remained relatively stable in 2003, rising 8.6 percent compared with 9 percent in 2002. Private spending, which reached $913.2 billion, accounted for two-thirds of the overall spending increase in 2003, according to the CMS.

Private health insurance premium growth decelerated for the first time since 1996, growing 9.3 percent in 2003, down from 10.7 percent in 2002. Spending for private health insurance benefits rose 8.2 percent, compared with 9.5 percent in 2002. Part of what tempered growth is that for the third consecutive year, health insurance enrollment declined by nearly one percent. The authors attribute that decline to job losses in specific sectors as well as a reduction in take-up rates by employees for employer-sponsored health insurance. Although a modest recovery in job growth began in the second half of 2003, most of the job growth was concentrated in industries that traditionally were less likely to offer health insurance. Fewer workers also enrolled in health insurance plans because of cost.

Consumer Spending Growing

Consumer out-of-pocket spending grew at nearly the same rate as overall spending but faster than in recent years, rising 7.6 percent in 2003 compared with 6 percent in 2002. This was the only major area with accelerated growth in 2003. The reason for the growth: Employers more aggressively sought employee cost sharing for health services, requiring such things as copayments for physician visits, separate hospital deductibles, and higher drug plan copayments. Nearly a quarter of all out-of-pocket spending in 2003 was linked to prescription drug purchases, up from 17 percent in 1998. The CMS says that the faster growth in out-of-pocket payments reflects the changing benefit structure in employer-sponsored health insurance plans that require more cost sharing as well as rising numbers of uninsured Americans who have to pay for their own care.

Spending By Health Sector

Spending decelerated in nearly all of the health care sectors but the pace varied widely. Prescription drug growth slowed more sharply than the growth of any service, increasing 10.7 percent in 2003 compared with 14.9 percent in 2002. Here are highlights:

Hospitals. Spending reached $516 billion, increasing 6.5 percent in 2003, compared to 8.5 percent in 2002. This was the first deceleration in hospital spending growth since 1998, when the Balanced Budget Act was implemented. The slowdown was largely attributable to the deceleration in public spending, which accounts for nearly three-fifths of the hospital spending pie. Medicaid spending growth for hospital services also slowed dramatically in 2003, falling seven percentage points to 4.8 percent. The deceleration reflected actions in many states that froze payments to hospitals and tightened eligibility requirements to deal with budget shortfalls. Medicare spending growth slowed as well because of the expiration of the supplemental funding provisions, rising 5.3 percent in 2003, following growth of 7 percent growth in 2002.

Prescription Drugs. Retail sales of prescription drugs rose 10.7 percent to $179.2 billion, accounting for 11 percent of national health spending. The increase in sales is consistent with average annual growth recorded between 1992 and 1997 but was much less than the nearly 15 percent growth measured in 2002. Factors that drove slower growth include the following: the dispensing of fewer prescriptions; the conversion of the nonsedating antihistamine Claritin to over-the-counter status; increased availability and consumption of lower-price generic drugs; an expansion in use of tiered copayment plans that put more cost-sharing burdens on consumers; and a shift in drug sales to other non-U.S. pharmacies. In contrast to the private sector, Medicaid spending on prescription drugs rose 17.5 percent in 2003, a rate that is comparable with those of recent years. At present, Medicaid is the largest public sector payer for prescription drugs. In contrast with the private sector, less cost sharing is allowed, which leaves states with less control over how to curtail spending growth.

Physicians. Spending for physician services rose 8.5 percent in 2003, to $369.7 billion, similar to the 8.2 percent increase in 2002. Consumer copayments for physician services edged upward causing out-of-pocket spending to rise 8.3 percent in 2003, compared with 5.1 percent in 2002. Although private spending for physician services rose, public spending decelerated from a growth rate of 8.1 percent to 6.7 percent.

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 2005 issue will be provided free to interested members of the press. Address inquiries to Jon Gardner at Health Affairs at 301-347-3930 or via e-mail, press@healthaffairs.org. Selected articles from the January/February 2005 issue are available free on the journal’s Web site, www.healthaffairs.org.

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©2004 Project HOPE–The People-to-People Health Foundation, Inc.