Government

Health spending outpaces economy

Expected Medicare pay cut would reduce growth in payments for physician services next year, government economists say.

By Joel B. Finkelstein — Posted March 14, 2005

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Washington -- Although future health care spending growth is expected to be significantly slower than it has been in the past decade, some experts still describe current trends as unsustainable.

Health spending is estimated to have hit $1.8 trillion in 2004, according to a recent report by actuaries and economists at the Centers for Medicare & Medicaid Services, published online by Health Affairs. That represents slower growth than 2003, 7.5% compared with 7.7%. But that rate still outpaced expansion in the overall economy, which was 6.5%.

Economists expect the trend to continue. As a result, health spending is projected to grow from 15.4% of the gross domestic product in 2004 to 18.7% in 2014.

As the chunk of the national economy swallowed by health spending increases, lawmakers might be forced to act to hold down costs, some analysts predicted.

"The way we've organized insurance, government and private, is really in the very long term unsustainable," said economist C. Eugene Steuerle, PhD, a senior fellow at the Urban Institute. "This cost growth is putting enormous pressures on the system that I think have to play out, and will play out long before the 2014 numbers you see that the actuaries put forward here."

But CMS officials note that their calculations are based on the assumption that there is no change in the law that would affect how the government pays for health care.

"Our projections of health care costs for the future are uncertain," said Rick Foster, CMS' chief actuary. "We like to think we do a pretty good job at this, but we also recognize that the crystal ball we use is fairly fallible."

This approach to projecting health spending is necessary, Foster said.

"We don't want to be in the business of anticipating or guessing what such law changes might be. It's hard enough predicting health care costs in the future. But in particular, it does have some limitations," he said. He pointed to the Medicare physician payment situation as an example.

Physician and clinical services are expected generally to keep pace with the increase in overall health spending. An exception to this trend is forecast for 2006, the first year in a series of annual Medicare physician payment cuts.

The reduction would help knock the overall increase on physician services to 6.6%, compared with 7.3% for total health spending.

CMS actuaries, however, predict that Congress will intervene before the cuts called for under Medicare's sustainable growth rate formula through 2012 go into effect. The AMA is fighting to prevent the cuts.

"As we said in last year's trustee report, the mechanism for physicians under Medicare, the sustainable growth rate system, in fact, is not sustainable," Foster said.

In general, physician and clinical services make up about 22% of health expenditures, a proportion that should remain relatively stable over the next 10 years.

"Our expectation is that physician spending growth relative to overall health spending growth will maintain a pattern consistent to what we've seen in the history," said Stephen Heffler, director of CMS' National Health Statistics Group.

Behind the trends

Beyond overall health spending growth, the CMS estimates also show an evolving shift in who will foot the health care tab in the future.

"The implementation of the [Medicare drug] benefit, as well as the expected continuation of the longer-term trend toward more public funding of health care, leads us to anticipate that the public sector will pay for nearly half [49%] of all spending in the United States by 2014," Heffler said.

By comparison, the government paid about 25% of health care costs in 1965 and about 46% the past few years.

The actuaries found that the Medicare drug benefit will contribute to a spike of 12.1% in overall public spending next year, compared with 8.1% this year.

Expected continued growth in the Medicaid program also will contribute to this increase in government spending, they said.

Meanwhile, health spending from private sources will slow. Growth will be only 3.1% in 2006 because of several factors, including downward pressure on how much care people are receiving, Heffler said.

"This could be due in part to the continuation of efforts to increase cost sharing," he said.

The slowdown is also being driven by the insurance underwriting cycle.

For the past several years, health insurance premiums have grown faster than health care costs. Now insurance companies' rate increases are falling more into line with overall health spending growth, he said.

An exception to the slower private health spending growth is consumers' out-of-pocket costs.

Although the introduction of the Medicare drug benefit is expected to bring a pronounced drop in Americans' average out-of-pocket spending, the CMS actuaries predict that the dip will be temporary.

Historically, out-of-pocket spending has been one of the few areas of national health expenditures that has actually declined. Over the past few years, however, personal health care spending has begun to increase and is expected to continue growing in line with the overall rise in spending in the future, Heffler said.

That finding is a concern, because research has shown that greater out-of-pocket costs lead to reduced utilization of both necessary and unnecessary care, said Karen Davis, president of the Commonwealth Fund.

"Shifting more costs to patients is particularly burdensome for the uninsured or underinsured, and those with low incomes or chronic illnesses. Instead of shifting costs to patients, we need to move toward a high-performance health care system," Davis said.

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ADDITIONAL INFORMATION

Growth projections

Spending on physician services fluctuates somewhat from year to year but generally follows overall growth in health care expenditures. But Centers for Medicare & Medicaid Services projections show a relative drop-off in growth next year if lawmakers don't act to stop a statutory 5.2% reduction to the Medicare physician reimbursement rate.

National health
expenditures
(in trillions)
NHE growth Physician/clinical
services
(in billions)
P/C services
growth
2002 $1.6 7.9% $340.8 7.3%
2003 $1.7 7.7% $369.7 8.5%
2004 $1.8 7.5% $397.2 7.4%
2005 $1.9 7.3% $425.7 7.2%
2006 $2.1 7.3% $453.8 6.6%

Note: Data for 2004 and beyond is projected.

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

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External links

"Trends: U.S. Health Spending Projections for 2004-2014," abstract, Health Affairs, Web exclusive, Feb. 23 (link)

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