Healthcare spending continues to soar, but not as fast as expected

April 1, 2006

WASHINGTON, D.C.-- Total U.S. healthcare spending will rise about 7% a year in the coming decade to reach about $4 trillion by 2015. While this total will amount to a whopping 20% of the nation's gross domestic product, the rate of growth actually will be slower than predicted earlier, according to economists at the Centers for Medicare and Medicaid Services (CMS). This growth will be driven by rising disposable income, policy changes (i.e., Medicare expansion) and rising prices, but not, interestingly enough, by an aging population as this period will see just the leading edge of maturing baby boomers.

WASHINGTON, D.C.-Total U.S. healthcare spending will rise about 7% a year in the coming decade to reach about $4 trillion by 2015. While this total will amount to a whopping 20% of the nation's gross domestic product, the rate of growth actually will be slower than predicted earlier, according to economists at the Centers for Medicare and Medicaid Services (CMS). This growth will be driven by rising disposable income, policy changes (i.e., Medicare expansion) and rising prices, but not, interestingly enough, by an aging population as this period will see just the leading edge of maturing baby boomers.

Growth in Medicare spending will spike up 25% in 2006, with the implementation of the Part D drug coverage plan, but then settle down in the 5% to 7% range in coming years. Higher payments to physicians and other providers, though, could boost outlays considerably. At the same time, the Medicaid program will decline noticeably, as Medicare supports drug benefits for millions of low-income elderly previously covered by state programs.

SLOWER RISE IN DRUG SPENDING

With the implementation of Part D drug coverage, the Medicare share of drug outlays is predicted to rise from 2% in 2005 to 27% in 2006 (vs. 3.8% without Part D). Over the long term, according to the CMS analysis posted on the Health Affairs Web site (http:// http://content.healthaffairs.org/cgi/content/abstract/hlthaff.25.w61), prescription drug spending will grow because of broader access and the development of more high-cost medications to treat serious conditions. At the same time, expenditures will be constrained by increased use of generic drugs and a continued rise in copayments.

Medicare drug coverage will be a major factor driving outlays, points out Health Strategy Associates Founder and Principal Joseph Paduda. "Many who did not have very rich prescription coverage before now will have it, and doctors who might have been reluctant to prescribe medications before will be more inclined to do so now," he explains.

DIFFERENT PICTURE

Although this government report paints a fairly positive picture of how features of the Medicare drug coverage program are able to restrain spending and reduce out-of-pocket costs for beneficiaries, critics of the program offer a contrasting view. Staff reports released by Rep. Henry Waxman (D-Calif.) indicate that Medicare drug plans are charging higher prices than those offered previously by the Medicare drug discount cards, and that prices set by Medicare drug plans increased in just the first two months after the Part D program went into effect. Another report by the Government Accountability Office for Waxman also found "miniscule discounts" offered to the Medicare drug plans in the program's early days.

SENIORS SAVE MORE

In response, CMS analysts calculated discounts and rebates offered by prescription drug plans and concluded that Medicare beneficiaries joining drug plans can cut costs by at least 40%, and much more depending on the design of the plan and use of generic drugs and mail-order services. The analysts note that the large discounts and additional rebates negotiated by Medicare drug plans result in prices as good as or better than those paid by Medicaid programs. Beneficiaries with multiple chronic conditions, who thus have very high drugs costs, achieve the highest savings under the Medicare program because they will end up qualifying for catastrophic coverage.