Slower spending: Growth in national health care expenditures slows for third year

The growth in national health expenditures decelerated for the third straight year in 2005, thanks largely to a clampdown on spending on brand-name prescription drugs.

Overall U.S. health spending increased by 6.9% in 2005, down from 7.2% in 2004, according to "National Health Spending in 2005: The Slowdown Continues," a report by the Centers for Medicare & Medicaid Services published in the January/February Health Affairs.

Spending on physicians and clinical services -- a measurement of revenue to doctors and clinics -- also saw its third consecutive year of slower growth. It increased 7% in 2005, down 0.4 percentage points from 2004. Doctors and clinic revenues accounted for slightly more than a fifth of the $1.99 trillion in U.S. health expenditures in 2005.

Private spending, Medicaid and Medicare all had a hand in the trend. Private insurance spending on doctors climbed by 6.9% in 2005, compared with 7.3% in 2004, according to Cathy Cowan, a CMS economist and one of the report's coauthors.

This could have been driven by a combination of fewer employees with health benefits, as well as insurance plans and employers offering less-generous coverage with higher co-payments and deductibles, Cowan said.

Medicare also contributed to the overall decline in physician spending growth, the report said. Doctors and clinics saw a 9.5% increase in Medicare spending in 2005 -- a drop from 10.4% in 2004. One factor was the Medicare Modernization Act. While boosting payments to doctors by 1.5% in 2005, it also restricted spending on physician-administered drugs. That was a big enough reduction to keep Medicare spending on doctors in check, according to the CMS Office of the Actuary.

The Medicare Part D prescription drug benefit, which began Jan. 1, 2006, was not a factor in the 2005 figures.

Medicaid saw slower growth on physician spending as well -- increasing at 7.3% in 2005, compared with 9.6% in 2004, the report said.

At least 34 states enacted physician reimbursement rate freezes or reductions for Medicaid in 2005, according to reports in fall 2005 and in 2006 by Health Management Associates and the Kaiser Family Foundation. That trend is already changing. A majority of states' payment rates climbed in 2006, the latter report found.

Push toward generics fuels change

The big news in the CMS report, however, was the continued slowdown in drug spending growth. Prescription drug expenditures increased by 5.8% in 2005. That is 2.8 percentage points lower than in 2004 and a far cry from the double-digit rises of previous years.

Slower drug spending growth was due, in part, to:

• The proliferation of tiered co-payments in private health plans, which led patients to consider lower-priced or generic drugs.
• The introduction of fewer brand-name drugs.
• The debut of generic versions of popular brand-name drugs.

It was the first time since 1993 that drug spending rose at a slower rate than overall health spending, according to report co-author Aaron Catlin, a CMS economist.

Even though tiered co-payments became a standard part of health insurance a few years ago, the feature is still helping to keep spending in check, said Mohit Ghose, spokesman for America's Health Insurance Plans. In 2004, 65% of workers with health coverage had three-tier drug co-payments, compared with 27% in 2000, according to the Kaiser Family Foundation and the Health Research and Educational Trust.

Bulk buying saves

Medicaid drug spending saw one of the biggest slowdowns, increasing only 2.8% in 2005, compared with 11.6% in 2004. This huge drop came about in part because states controlled costs by joining multistate drug purchasing pools and changing formularies to include drugs with better manufacturers' rebates, the report said.

West Virginia, for example, joined Maryland and Louisiana to form a purchasing pool approved by CMS in May 2005, said Shannon Riley, spokeswoman for West Virginia's Bureau for Medical Services. In the 12 months beginning in July 2005, the state saved $40 million on prescription drugs through the pool, which now includes four other states, she said.

CMS' Cowan said doctors didn't play a decisive role in the broad shift toward generic drugs. But one family physician said newer technology can help patients save money on prescription drugs. For the last few years Thomas Weida, MD, has been using a computer program that allows him to find the best drug values in patients' formularies.

Patients nearing the gap in Medicare Part D coverage especially appreciate having cheaper drug options, said Dr. Weida, speaker of the congress of delegates of the American Academy of Family Physicians and a professor of family and community medicine at Penn State College of Medicine in Hershey, Pa.

Despite the recent slower growth, overall health spending neared the $2 trillion mark in 2005, almost double the $1 trillion of 1995. This is due in part to advances in expensive medical technology, including new drug therapies, and increased use of high-cost services and procedures, according to the Government Accountability Office.

The U.S. spends nearly 16% of its gross domestic product on health care, far more than other industrialized nations. Steadily increasing health care expenses for businesses pose a threat to their competitiveness and contribute to their decisions to move jobs overseas, hire part-time instead of full-time workers, and minimize pension costs, according to a February 2005 GAO report.

With the oldest baby boomers retiring next year, growth of spending in federal health programs is a long-term threat to the nation's economy, said Federal Reserve Board Chair Ben S. Bernanke in Jan. 18 testimony to the U.S. Senate.

If Congress continues to finance the national debt by selling bonds to foreign countries and health spending rises as projected, it could trigger a fiscal crisis only solved by drastic spending cuts or higher taxes, Bernanke said.