Embargoed for release
Wednesday, February. 23, 2005
9:30 a.m. EST


For more information, contact:
Janet Firshein or Kari Root at 301/652-1558
Jon Gardner at Health Affairs at 301/347-3930



Public Sector to Account for Nearly Half of Health Spending in 2014

(BETHESDA, MD)—Within the next decade, public spending will account for nearly half of the nation’s health care pie — a record portion that could have major implications for the overall national budget, federal economists predict in today’s Web-Exclusive edition of Health Affairs.

The authors, economists and actuaries from the Centers for Medicare and Medicaid Services (CMS), also estimate that by 2014 health spending will constitute 18.7 percent of the gross domestic product, up from 15.3 percent in 2003. “Over the next decade, health care spending is expected to account for a larger portion of our economy’s resources, while at the same time the public sector would fund a larger share of the nation’s health care bill,” says lead author Stephen Heffler, director of the National Health Statistics Group at the CMS. “These trends will test society’s willingness to find ways to slow cost growth without compromising quality or access.”

In the first analysis of the effect of the new Medicare prescription drug law on overall health spending, the authors say that the new drug benefit will lead to a “substantial shift” in funding from private payers and Medicaid to Medicare over the next decade. “The implementation of the Part D benefit has very little impact on overall health spending or total prescription drug spending but it has a significant impact on who is paying for prescription drugs,” says Heffler.

“U.S. Health Spending Projections for 2004-2014” covers a variety of sectors in the health care field, examining spending trends for prescription drugs, hospitals, physicians, and long-term care. It also examines projected trends for various payers, including Medicare, Medicare managed care plans, Medicaid, private health insurance, and consumer out-of-pocket payments.

Highlights of the report:

Prescription drugs. In 2006, when the Medicare Part D benefit kicks in, there will be a large shift in funding for prescription drugs to Medicare from private payers, including private health insurance, consumer out-of-pocket payments, and Medicaid. The authors project that Medicaid spending will account for 18.1 percent of prescription drug spending in 2005, a share that is anticipated to drop to 9.4 percent in 2006, when all dual-eligible Medicare and Medicaid enrollees will receive Medicare drug coverage. Private prescription drug spending will account for 76.1 percent of all drug spending in 2005, a share that is set to fall to 59 percent in 2006. Over the next decade, the authors anticipate aggregate prescription drug spending growth to continue the deceleration that began in 2000. They cite several reasons for the expected slowdown, including the increased availability and consumption of low-cost generic drugs, the increased use of tiered-copayment drug plans, the withdrawal of Vioxx from the market, the anticipation of more drugs shifting to over-the-counter status, and the expectation that few of the new drugs in the pipeline will achieve blockbuster status.

Hospitals. Hospital spending growth will peak in 2004 at 7.0 percent and grow at an average rate of 6.2 percent over the following 10 years. Public-sector spending is projected to accelerate in 2004, with strong growth projected in both Medicare and Medicaid. Private-sector spending growth is expected to slow as a result of greater use of utilization management tools and increases in patient cost sharing.

Home health care. Home health spending will grow 13.0 percent in 2004, up from 9.5 percent in 2003. The acceleration in growth is attributable to growth in Medicare home health spending, following a one-time legislated payment reduction in 2003, as well as strong growth in Medicaid spending.

Medicare managed care. A retooled version of Medicare managed care, Medicare Advantage (MA), will be introduced in 2006. Payment increases to managed care plans in 2004 and 2005 as well as allowance of regional preferred provider organizations (PPOs) will greatly increase enrollment, according to the CMS report. They forecast that MA enrollees will constitute about 30 percent of total Medicare enrollees by 2014, compared with about 12 percent in 2003.

Private sector. Private health care spending is expected to slow to 7.4 percent in 2004 and 6.6 percent in 2005, from a peak of 9.0 percent in 2002. The deceleration is driven almost entirely by slower growth in the use of medical care, triggered in part by the quiet reimposition of utilization management tools by payers and the increased use of cost sharing to dampen demand for discretionary health services. The authors project that private spending will dip sharply to 3.1 percent in 2006, when the Medicare Part D benefit takes effect.

Health Affairs, published by Project HOPE, is a bimonthly multidisciplinary journal devoted to publishing the leading edge in health policy thought and research. This Web-Exclusive article is available free on the journal’s Web site, www.healthaffairs.org. Address inquiries to Jon Gardner at Health Affairs, 301-347-3930, or via e-mail, press@healthaffairs.org.


©2005 Project HOPE–The People-to-People Health Foundation, Inc.