Cost spiral slows, stays on upward path

February 1, 2010

Economic drivers likely the cause of slowdowns in healthcare spending, but the general cost curve remains unsustainable

Experts say the slowdown in total spending doesn't necessarily signal any long-term flattening of the cost curve.

"History would say it's not sustainable," says Bob Campbell, the state government leader for Deloitte LLP. "As the economy turns, so do healthcare costs."

Federal healthcare spending grew much faster than private or local government spending. Costs for various federal programs soared 10.4% in 2008, with Medicare increasing 8.6% compared with 7.1% the year before. Healthcare consumed 36% of federal revenue, compared with 28% in 2007.

In contrast, spending by private businesses grew only 1.2% in 2008, while state and local government spending grew 3.4%, compared with 6.6% the year before. Health Affairs, which published the report last month, said business costs for healthcare declined as private plan enrollment dropped by 1 million people-at least partly due to lost jobs.

The report, compiled by researchers at the Center for Medicare & Medicaid Services (CMS) attributed the overall health cost slowdown to the economic recession. But the jump in federal spending was due to faster Medicare spending growth on hospitals, physicians, Part D drug benefits, and private Medicare Advantage plans, as well as a temporary new infusion of federal funds into state Medicaid programs.

Costs for Medicare Advantage plans soared 21.3% in 2008-to $108.2 billion-similar to the 22.1% growth in 2007. That was due to 13.6% enrollment growth in private Medicare plans, and to a 22.9% increase in Part D drug spending within those plans.

"The slowdown is good news but likely reflects the recession and to some extent anticipation by providers of the threat of controls from healthcare reform," said Marilyn Moon, a health economist at the American Institutes for Research in Washington, D.C. "When people are feeling more secure, I expect we'll see it go up again."

By sector, U.S. spending on hospitals totaled $718.4 billion in 2008, with cost growth dropping to 4.5% from 5.9% the year before-the slowest rate of increase since 1998. Expenditures for physician and outpatient clinical services reached $496.2 billion, representing 5% growth, down from 5.8% and the slowest growth rate since 1996. But outpatient clinical costs rose faster than physician spending-6.6% versus 4.7%.