Government

2002 health care spending hit $1.6 trillion

Signs point to a possible slowdown in future growth, but plenty of room for improvement remains, experts said.

By Joel B. Finkelstein — Posted Jan. 26, 2004

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Washington -- The nation's health care tab rose again in 2002, stimulating new debate over what needs to be done to control future spending growth.

Spending on health care came to $1.6 trillion in 2002, an increase of 9.3% over 2001, said officials from the Centers for Medicare & Medicaid Services. Health care costs ate up 14.9% of the U.S. gross domestic product.

In 2002, health care spending grew faster than available resources, forcing the government, companies and consumers to dig deep to finance these costs, said Katharine Levit, director of the CMS National Health Statistics Group.

But the rampant growth already could be ebbing. Changes in the economy usually take two to three years to actually affect the health care sector, Levit said. "With the recession that began in 2001, this means we should probably begin to see some slowdown in spending," she said.

Other factors, such as the move to push more insurance costs onto workers and initiatives to boost health care efficiency, also might help to bring health spending growth more in line with the gross domestic product, experts said.

"While this is the fastest increase in a decade, and it's troubling, there's reason to believe that we're beginning to slow down and that it won't continue at this rate," said Karen Davis, president of the Commonwealth Fund, New York City.

More than half of health care spending goes to hospitals and doctors, but prescription drugs and health insurance profits eat up more than their share of dollars.

"Clearly, the largest piece of the growth is coming from hospital spending," Levit said. It accounted for 32% of the overall increase in 2002. But that is in proportion to spending on hospitals, which accounts for 31% of the national total. By comparison, prescription drugs make up 10% of health care expenditures but accounted for 16% of the spending increase in 2002.

Expenditures for physician services accounted for 18% of the national increase. But that is less than their proportion of overall spending, which is 22%. The amount spent on physician services was one of the few big-ticket items that increased less in 2002 than in 2001.

The growth in hospital spending may be due in part to market corrections, experts said.

"What we had in the mid-1990s was unsustainable squeezing of provider payment rates, so hospitals took steeper discounts than they could afford to take for the long term," Davis said. Once hospitals realized that their rates were unsustainable, they started pushing back on managed care to bring the rates back up.

Physicians experienced the same discounting pressures from managed care in the late 1990s. At first, physicians tried to compensate by working harder and seeing more patients, but now they are also pushing back on managed care and other payers to get the rates back to reasonable levels, she said.

"You need a catch-up on the part of hospitals and you need a catch-up on the part of physicians," Davis said. But that should mean that these increases will plateau in the near future and no longer drive dramatic growth in health spending, she said.

Health insurers also may be responsible for some of the rapid spending growth over the past few years. The CMS numbers showed that health insurance premiums rose much faster than overall health spending, meaning that plans increased their profit margins during 2002, experts said.

"It's pretty unprecedented that premiums go up so much faster than the bills they're paying," Davis noted. But that might be a swing in the insurance underwriting cycle, she added.

Looking to the future

The spending jump has led to a desire to find solutions.

"We recognize that health care costs are growing extremely rapidly, even if they're somewhat abating subsequent to this study here," said Jim Rodgers, senior research executive for the BlueCross BlueShield Assn. "They're still growing much faster than employers and consumers would really like to see."

The organization is working on several fronts to get more value for the health care dollar, including a recent alliance with Harvard University to study innovative programs that produce efficient and effective care.

The association also is looking into the use of expensive imaging technology, which research has shown is partly driven by how many machines hospitals and physicians are buying, Rodgers said. It is considering extending the model of tiered drug formularies to other medical services and products.

Ultimately, however, no single group can change the current upward trend, he said.

"Plans need to work with hospitals, and we need to work with physicians and even consumers," Rodgers said. "We're all responsible for doing something about this health care cost growth problem, and we all have proper incentive to do so because we all want the best available medical care to be affordable to everyone."

Davis said the focus should turn toward long-term initiatives to improve both the quality and efficiency of health care.

"High cost case management, predictive modeling -- these are the techniques that show real long-term promise for getting more value for what we're spending on health care, rather than some kind of short-run strategy like just making the patient pay more," she said.

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ADDITIONAL INFORMATION

Who gets what

Health care products and services cost Americans nearly $1.6 trillion in 2002. Here's how the money was divided.

Portion of
health spending
Hospitals 31%
Physicians 22%
Other professional services 10%
Prescription drugs 10%
Nursing home and home health 9%
Administration and overhead 7%
Research and construction 4%
Medical devices and equipment 3%
Government public health activities 3%

Source: Centers for Medicare & Medicaid Services, Office of the Actuary (numbers do not add up to 100% due to rounding)

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Spending ups and downs

Overall health spending rose 9.3% in 2002, the sixth consecutive year of growth. Some areas of spending rose faster, while others slowed a bit.

2001 2002
Prescription drugs 15.9% 15.3%
Insurance administration and overhead 12.5% 16.2%
Hospital care 7.5% 9.5%
Physician services 8.6% 7.7%
Home health care 6.2% 7.2%
Nursing home care 5.7% 4.1%
Durable medical equipment 2.3% 3.3%

Source: Centers for Medicare & Medicaid Services Office of the Actuary

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External links

"Health Spending Rebound Continues in 2002," abstract, Health Affairs, January/February (link)

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