The Health Care Cost Boom: Health spending to double by 2016
Benefits Management Briefs
August 2007
Page 7

Growth in the rate of health care spending has remained relatively steady over the past few years, but health care spending overall continues to grow faster than inflation and wage increases. The Centers for Medicare & Medicaid Services (CMS) recently released figures on health care spending growth in the United States through 2005 (the latest year for which data are available). According to CMS, health care spending rose 8.1 percent in 2003, but only 7.2 percent in 2004. Then, spending slowed for the third consecutive year, rising only 6.9 percent in 2005. The growth rate in 2005 represents the slowest growth rate since 1999, when health care spending rose 6.2 percent.

Another CMS report, National Health Expenditure Projections 2006-2016, projects a fourth year of slowed growth. Although actual costs are not yet available, CMS reports that the expected increase for 2006 is 6.8 percent, down slightly from 6.9 percent in 2005.

The report also projects that health care spending will top $4.1 trillion by 2016. That's more than double the nearly $2 trillion dollars spent in 2005. The CMS report further projects that the growth in health care costs will average 6.9 percent a year though 2016, and that health care spending, which currently represents about 16 percent of the Gross Domestic Product (GDP), will comprise nearly 20 percent of the GDP at the end of the projected period.

The newly released figures for 2005 show that the rate of increase in retail prescription drug sales has slowed for the sixth straight year. Growth in 2005 was 5.8 percent, nearly half of the 10.6 percent growth reported in 2003. CMS attributes the slowed growth to a dramatic decline in Medicaid prescription drug spending, greater use of generic medications, the growth of tiered copayments for prescription drugs, and a drop in the number of new drugs.

The new CMS figures also shed some light on private payers (i.e., out-of-pocket payment or private health insurance) in the United States. CMS notes that private payers spent $1.085 billion on health care in 2005. Private insurers picked up 64 percent, or $694.4 billion, of the total cost. Out-of-pocket payments accounted for 23 percent, or $249.4 billion, and other private funds contributed the remaining 13 percent, or $141.2 billion.

According to CMS, private health insurance premiums rose at a slower rate for the third consecutive year. Premiums increased 6.6 percent in 2005, down form 7.9 percent in 2004 and 10.5 percent in 2002. Most premiums - 94 percent - were related to employer-sponsored private health insurance. Employers' share of premiums rose slightly to 74.4 percent in 2005, while employees' share had a modest decline to 25.6 percent. But employees are paying more due to higher coinsurance and deductible amounts and changes in coverage criteria.

Other data featured in CMS's newly released data for 2005 include:

• Growth in spending for hospital care, which represented the largest share of health care spending in 2005, remained stable at 7.9 percent for 2004 and 2005.
  
  According to CMS, the more steady rate of growth in hospital spending is due in part to hospitals' ability to pass costs on to private payers because of their stronger negotiation positions. Reimbursement by private payers which accounted for 43 percent of hospital spending, grew 7.6 percent in 2005. Public payers accounted for the remaining 57 percent of hospital spending and rose 8.1 percent.
• Spending on physician and clinical services rose 7 percent in 2005. Public sources of payments for physicians rose more slowly, due in part to government cost-containment efforts.
• Expenses for freestanding home health care agencies grew 11.1 percent - the fastest growth among all services - in 2005. Spending on these agencies while still a small percentage of overall health care spending, has been in the double digits for the past three years. Public payments (e.g., government programs like Medicaid) account for 75 percent of spending for home care agencies.
• Payments for freestanding nursing home expenses rose 6 percent in 2005, surpassing the growth of 4.1 percent reported in 2004.
• An increase in overall public spending of 7.7 percent in 2005 topped the overall 6.3 percent rise in private spending.