Pace of healthcare spending continues to slow down

February 1, 2007

An annual government analysis of healthcare spending indicates that outlays for healthcare rose only 6.9% in 2005, continuing a three-year slow-growth trend. Total U.S. healthcare spending reached almost $2 trillion, or $6,697 per person, but this reflects the slowest growth in outlays since 1999, when "enrollment in more tightly managed care plans peaked," according to analysts at the Centers for Medicare and Medicaid Services (CMS).

WASHINGTON, D.C.-An annual government analysis of healthcare spending indicates that outlays for healthcare rose only 6.9% in 2005, continuing a three-year slow-growth trend. Total U.S. healthcare spending reached almost
$2 trillion, or $6,697 per person, but this reflects the slowest growth in outlays since 1999, when "enrollment in more tightly managed care plans peaked," according to analysts at the Centers for Medicare and Medicaid Services (CMS).

A key factor that slowed spending was weaker growth in outlays for prescription drugs. Drug spending rose just 5.8% to $200.7 billion, a dramatic deceleration from a peak growth rate of 18.2% in 1999. The report attributes this slowdown to more generic drug prescribing, as insurers set high copays for brand-name drugs and expanded tiered formularies. Drug prices rose 3.5% overall: a 6% rise in brand-name prices, offset by a continued shift to less-expensive generic products.

Medicaid outlays on prescription drugs also slowed sharply because of aggressive cost control initiatives, multistate purchasing pools, tighter formularies and efforts to boost manufacturers' rebates. Private sources paid for nearly 73% of prescription drugs in 2005, but this may change when the Medicare drug benefit enters the picture in an analysis of data from 2006.

Private sector spending on healthcare rose moderately overall as payments for healthcare services decelerated. Insurance premiums increased only 6.6%-the slowest rate of growth since 1997-partly because employers continued to shift more costs to employees. Payers increased the use of coinsurance, added deductibles and eliminated coverage for specific treatments and prescription drugs, increasing the burden on individuals to pay more for healthcare.

Similarly, the Employer Health Benefits study by the Kaiser Family Foundation (KFF) says that premiums for the more than 155 million Americans covered by employer-sponsored health insurance increased 7.7% in 2006, while inflation rose 3.5% and worker's earnings went up 3.8%.

"We're seeing at least some slowdown in the increase in healthcare for the first time in a number of years," says Henry Loubet, senior vice president and chief strategy officer for Torrance, Calif.-based Keenan. "This definitely portends some positive news: At least things are moving in the right direction. But clearly, premiums are going to outpace inflation at least for the foreseeable future."

MA PLANS ENJOY SPURT

Slower increases in provider spending also moderated Medicare outlays, which rose 9.3% to reach $342 billion in 2005, according to the CMS analysts. However, CMS notes a big growth in outlays for the Medicare Advantage (MA) program (up 19.8%) due to recent legislation raising MA plans payments and expanding plan coverage. Enrollment in MA plans rose 7% in 2005 after stabilizing in 2004 following several years of decline.

MANAGED HEALTHCARE EXECUTIVE Managing Editor Benjamin Nagy contributed to this report.