National spending growth on doctor services rises

Medical breakthroughs and demand generated by an aging population are two reasons for the increase.

By David Glendinning — Posted Jan. 30, 2006

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Washington -- The growth in the nation's total spending on health care slowed in 2004, but expenditures on physician services swung upward.

Patients, along with both public and private payers, spent just about $400 billion on doctor care in 2004, according to a recent report by the Centers for Medicare & Medicaid Services Office of the Actuary published in the journal Health Affairs. This 9% increase over the 2003 figure is the largest boost in such spending in about 15 years.

Spending on more services offered by physicians, as well as the increasing complexity of services, is playing a large role in driving annual national health expenditures up toward the $2 trillion mark, the authors said. Physician services accounted for nearly a quarter of the $137 billion increase in total spending on health care in 2004, while hospital spending made up 33%.

The trend is significant for the people who pay the doctors' bills, said Cynthia Smith, a CMS economist and lead author of the report.

"The trajectory of health care spending continues to be driven by new medical treatments, rising prices and growing utilization," she said. "Medical progress has improved health care for many families, but rising costs are also a growing burden for households, businesses and governments."

The medical reasons for these trends come as no surprise to physicians, said AMA President J. Edward Hill, MD. "Medical advances, such as research breakthroughs, innovations in technology and a focus on preventive care, are improving the health of America's patients, but they are also increasing the need for medical services. Conditions that once required hospitalization now are routinely treated in physicians' offices at a lower cost to insurers and patients."

Re-examining doctor payments

Private and public payers may react to continued growth in spending on physician care by paying less for certain services.

"As costs rise, the efficiency of health care spending is increasingly scrutinized, which has led to greater interest in paying for improved quality or outcomes, disease management and consumer-directed health care," Smith said.

The impact that doctor care is having on Medicare's financing in particular has caught the attention of federal officials. The report said Medicare spending for physician services had risen more than 11% in 2004, up from less than 9% in 2003. Since updates in the base Medicare rates for physicians held steady during that time, the spending bump must be due to doctors increasing the volume and intensity of services per program beneficiary, the actuaries concluded.

Program officials already have started looking into whether they are paying too much for some services and inadvertently creating an incentive for doctors to increase volume and intensity. The investigation started nearly a year ago, when preliminary Medicare spending data for 2004 indicated a surge in office visits and in the ordering of nonsurgical procedures and imaging scans.

Lawmakers will respond to this new report and other recent data that call into question the level of physician reimbursement for certain services, said CMS Administrator Mark McClellan, MD, PhD. "Even though spending in some areas is coming down, we're still seeing some very rapid spending growth in physician services. Congress is going to be more interested than ever in moving to a system that gets to higher quality while avoiding unnecessary costs in our health care system."

Physician groups, such as the AMA, have countered that clinical necessity, not potential reimbursement, prompts doctors to order more Medicare services for their patients.

"Americans are living longer than ever, more are entering Medicare, and chronic disease continues to increase, which naturally leads to an increased need for physician services," Dr. Hill said. "The government itself has encouraged the expansion of physician services under Medicare, adding or expanding coverage for more than 80 diagnostic tests and medical treatments since 1999."

Drug spending growth eases

National health expenditures in 2004, which increased roughly 8% to about $1.9 trillion, are not as high as they could have been. The rise in physician and hospital spending was largely offset by a significant decrease in the rate of drug spending growth, the report said.

Payers bought roughly $190 billion worth of prescription drugs two years ago, an 8.2% rise over 2003. This marked the first time in the past decade that a year's increase dipped into single percentage points, the CMS actuaries said.

Smith attributed the development to more widespread use of generics and mail-order pharmacies, as well as greater avoidance of some therapies that had been associated with health safety concerns. Insurers also have started managing their spending on drugs more aggressively in recent years in an effort to keep costs down, she said.

But the figure doesn't yet take into account the launch of the Medicare prescription drug benefit, which is expected to exert major upward pressure on drug spending starting this year.

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Trending upward

National spending on physician services in 2004 rose by 9% over the previous year, to just about $400 billion. This jump is the largest increase in this sector since 1991. Here's a look at growth in expenditures on doctors' services.

Increase Total spending
(in billions)
1997 4.6% $240.9
1998 6.4% $256.4
1999 5.2% $269.6
2000 7.0% $288.6
2001 8.5% $313.1
2002 7.9% $337.9
2003 8.6% $367.0
2004 9.0% $399.9

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

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