U.S. health spending tops $2.2 trillion

Washington -- National health spending in 2007 grew at its slowest pace since 1998, largely due to a sharp slowdown in the growth in spending on prescription drugs, according to federal actuaries. Growth in spending on physician services slowed slightly.

Overall health spending increased by only 6.1% in 2007 to reach $2.24 trillion, according to the annual Centers for Medicare & Medicaid Services report, published in the January/February issue of Health Affairs. Health expenditures last dipped below the 6% growth mark in 1998.

Prescription drug spending grew by only 4.9% in 2007, its slowest rate of growth since 1963 and down from an 8.6% growth rate in 2006. The deceleration on the prescription drug side accounted for more than half of the slowdown in overall health spending in 2007, the CMS actuaries said. Patient spending on medications was kept in check by the higher use of generic drugs, chain store discount programs and consumer concerns about drug safety warnings.

The end of the implementation of Medicare's prescription drug benefit also helped restrain health expenditure growth in 2007, the report said. Medicare spending growth on administration was down in 2007 after a spike the year before attributed to the one-time impact of phasing in Medicare Part D.

The growth in physician and clinical services spending -- a combined measure of revenues to both doctors and clinics -- held steady between 2006 and 2007. The pace of spending on outpatient clinics and ambulatory care centers quickened.

But spending on physicians alone, which accounts for 80% of this category, saw slightly slower growth in 2007 -- 5.9% compared with 6.4% in 2006. That's in part because of slower growth in the volume and intensity of physician services, said Patricia McDonnell, a CMS social science research analyst and report co-author.

Spending on most health care services other than prescription drugs grew at the same rate as 2006 or faster.

AMA President Nancy H. Nielsen, MD, PhD, welcomed the overall deceleration in health spending. "We hope this trend continues as we work to get the best value from our health care dollars."

CMS Chief Actuary Richard S. Foster said that although recent trends have been positive, health spending growth in 2007 was still faster than the rate of inflation and wage growth. In addition, the current rate of generic drug use cannot increase forever.

"I wouldn't expect the good news to continue," Foster said.

Overall, growth in national health spending has been slowing since 2002. This trend, especially between 2002 and 2004, largely has been due to higher use of generics and more moderate increases in the net cost of private health insurance, the report said. Insurers count their net cost as the difference between premiums they receive and claims they pay.

Foster offered a theory about health spending growth. As new medical treatments are available, they cost more and people are willing to pay for them. But much of the spending is not producing better outcomes.

Maximizing value while controlling costs is "a balancing act that to date the U.S. has not tried terribly hard to tackle," he said.

Medicare fees have an impact

As a subset of total health expenditures, Medicare spending growth on physician and clinical services decelerated to 4.6% in 2007 from 6.3% in 2006. This drop is due in part to imaging fee cuts in the Deficit Reduction Act of 2005. Growth in spending on doctors also was kept in check by the fact that Congress froze Medicare rates to physicians in 2007.

In approving the 2005 legislation, Congress was attempting to curtail what it saw as overly rapid growth in physician-administered advanced imaging, such as CT and MRI scans. Medicare spending on all physician imaging services doubled between 2000 and 2006, reaching the $14 billion mark in that year, according to a Government Accountability Office report released in September 2008. The deficit reduction law reduced fees in 2007 for administering many physician imaging tests by limiting them to outpatient hospital rates.

The move reduced Medicare per-beneficiary spending on physician imaging between 2006 and 2007 after years of steady increases, according to the GAO report. But the reduced fees did not appear to have the desired effect on imaging utilization, at least not right away. The number of tests performed per beneficiary continued to increase at a rate comparable to prior years. That's because the physicians performing the scans generally aren't the ones ordering them, said Bibb Allen, MD, chair of the American College of Radiology's Commission on Economics.

Although the cuts did not put most imaging centers out of business, they are squeezing lower-volume centers, Dr. Allen said.

"Imaging centers and practices away from the hospital aren't buying and updating their equipment like they used to be able to do," he said. They're also taking a hard look at the number of employees they maintain.

Further cuts could lead to facility closures, especially of rural imaging centers, which would force Medicare beneficiaries to travel even farther to receive needed scans, Dr. Allen said.

Given that private insurers typically base many of their rates and coverage decisions on how Medicare sets them, insurers likely followed Medicare's lead and adopted imaging fee cuts of their own, said Benjamin Washington, a CMS statistician. But the agency does not compile data that would show the extent of this trend.

Also, private health plans are increasing physician fees only slightly, if at all, Washington said. "We're seeing that trends in private physician payments are pretty much reflecting what we're seeing in Medicare."

Drug spending should rebound

The pace of growth in drug spending has slowed recently because more generic drugs have been prescribed, a number of blockbuster drugs have lost patent protection, fewer new drugs have been approved and larger drug rebates have been negotiated from manufacturers by payers, said Joshua Cohen, PhD, a senior research fellow at the Tufts Center for the Study of Drug Development.

But steady increases in the use of biopharmaceuticals and specialty drugs could help propel drug spending back up at faster rates in future years, Cohen said. Many new biopharmaceuticals are in the works to fight diseases such as cancer or Alzheimer's, and some of these drugs won't have as much competition as new, chemically manufactured drugs have had, he said.

"You would expect ... that sooner or later we will get out of this dip of new approvals being so low," he said. "And that will drive spending up."