Healthcare spending spurred by Part D

February 1, 2008

Washington, D.C.-National healthcare spending rose 6.7% in 2006 to $2.1 trillion, just slightly faster than the previous year but still fairly stable. Overall, outlays for healthcare reflected a continued slowdown from the double-digit growth rates of the 1990s. Payments for most major health services-hospitals, physicians, nursing homes, home health services-experienced slower growth than 2005.

Total spending by the private sector also moderated in 2006. Private health insurance premiums grew only 5.5% in 2006, the slowest rate of growth since 1997, according to an annual report from the Office of the Actuary in the Centers for Medicare and Medicaid Services (CMS), published in the January/February 2008 issue of Health Affairs. And out-of-pocket spending by individuals rose only 3.8% in 2006, a drop from 5.2% growth the previous year.

MORE FOR DRUGS

The main factor driving this trend was full implementation of the Part D drug benefit. Drug coverage for seniors increased utilization of prescription drugs, as millions of beneficiaries who previously paid out-of-pocket for medicines gained insurance coverage.

Utilization also was stimulated by added indications for existing drugs and increased use of high-priced biotech therapies in the "specialty drug" class. Despite this acceleration, the 2006 growth was still well below increases that averaged about 13% between 1995 and 2004.

As a result, Medicare expenditures shot up by 18.7%, compared with a 9.3% rise in 2005, the fastest rate of growth in Medicare since 1981. Although Medicare experienced a decrease in inpatient admissions and physician spending, outlays for drugs offset those reductions.

Another factor driving up Medicare outlays was a dramatic (48%) boost in payments to Medicare Advantage plans, due primarily to a 25% jump in MA plan enrollment in 2006 (see Politics & Policy). MA plans also experienced a rise in spending for physician and clinical service and for administration and net cost of insurance. And MA payments for prescription drugs increased markedly in 2006 to $8.6 billion, up from $1.5 billion in 2005.

BROAD IMPACTS

In addition to boosting outlays for drugs, Part D affected healthcare spending by private payers, individuals and government programs. Employers, for example, saw healthcare costs decline due to subsidies for drug expenditures by many retirees.

In addition, the shift of low-income, "dual-eligible" seniors from drug coverage under Medicaid to Medicare Part D plans affected outlays by the two public health programs. The Medicare share of total prescription drug spending jumped from 2% in 2005 to 18% in 2006, while Medicaid's share fell from 19% to 9%.

This change also reduced rebates paid by pharmaceutical manufacturers. State Medicaid programs benefit from laws allowing them to collect rebates from manufacturers up to 30%, the analysts pointed out, while the private plans tend to negotiate rebates in the 10% range. Although private plans can negotiate rebates very effectively, explained CMS actuary Richard Foster at a press briefing, they can't match what a state can do if it passes a law setting rebates at a certain level.

Even with lower rebates, the cost of Part D was less than originally expected, Foster commented, due to higher-than-expected competition among Part D plans and increased generic drug use. Generic drugs accounted for 63% of prescriptions in 2006, up from 56% due to lower copays and the appearance of generic versions of more blockbuster drugs.