Healthcare spending slows as a result of better management of drug expenditures

February 1, 2006

Total outlays for U.S. healthcare did not rise as fast as expected in 2004, primarily because private payers held the line on insurance premiums and outlays for prescription drugs. Overall spending on healthcare still increased by 7.9%—much faster than the rate of inflation—but below the 8% to 9% growth rates of the two previous years. Even with slower growth, though, U.S. healthcare expenditures amounted to almost $2 trillion, or more than $6,000 per person in 2004, and accounted for 16% of the nation's gross domestic product, about the same as the previous year.

WASHINGTON, D.C.-Total outlays for U.S. healthcare did not rise as fast as expected in 2004, primarily because private payers held the line on insurance premiums and outlays for prescription drugs. Overall spending on healthcare still increased by 7.9%-much faster than the rate of inflation-but below the 8% to 9% growth rates of the two previous years. Even with slower growth, though, U.S. healthcare expenditures amounted to almost $2 trillion, or more than $6,000 per person in 2004, and accounted for 16% of the nation's gross domestic product, about the same as the previous year.

Private payers played a large role in curbing healthcare spending in 2004, according to a report from the Office of the Actuary at the Centers for Medicare and Medicaid Services (CMS), in the Department of Health and Human Services (HHS). Growth in private sector outlays slowed to 7.6% in 2004, compared with 8.6% the previous year. At the same time consumer out-of-pocket spending rose only 5.5%. Private insurance payments increased 8.6%, but this was much less than the 9.8% jump in 2003.

The main factor driving up healthcare costs was higher bills from hospitals (up 8.6%) and physicians (up 9%); these services accounted for more than 60% of the total spending increase in 2004. Hefty payrolls were the main factor driving up hospital costs, while physicians boosted revenues by seeing more patients and ordering more tests and procedures per visit.

The big news from the HHS analysts is a noticeable slowdown in spending growth for prescription drugs. Retail spending on pharmaceuticals rose only 8.2% in 2004, a big drop from the 10% to 15% increases during the five previous years, and the first single-digit annual increase in 10 years. As a result, outlays on drugs remained about 11% of all healthcare spending.

The report credits this drop to efforts by plans and PBMs to promote more generic drug prescribing through lower copayments and other strategies. Generic drug use grew at double-digit rates for the third straight year, boosted by greater demand and increasing supplies. A lagging pace in the introduction of expensive new products, safety concerns about some leading medicines and increased use of lower-cost mail-order pharmacies also contributed to the slower growth rate.

Insurers and PBMs also supported more mail-order purchasing, a segment that rose by 13.6% to account for about 17% of total prescription sales. Health plans get credit for encouraging consumers to purchase over-the-counter medicines by boosting copayments or dropping coverage of comparable prescription products. The power of these market forces is reflected in the ability of private health insurers to keep their growth in spending for drugs to only 6.4%.

State Medicaid spending also decelerated in 2004 as result of similar cost containment efforts. In addition to encouraging generic drug use, states adopted prior authorization policies and dispensing quantity limits; negotiated higher rebates; and joined multistate purchasing pools.

PBMs jumped in to take credit for the drug spend slow-down. Mark Merritt, president, Pharmaceutical Care Management Assn. (PCMA), pointed to the HHS data as a "testament to PBMs' work over the past decade to change the way consumers, clinicians and purchasers think about prescription drugs."