Health spending outlay tops $2 trillion, but spending growth on doctors declines

The pace of national health spending remained nearly steady, but higher increases may be on the horizon.

By — Posted Jan. 28, 2008

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While the national health spending growth rate increased slightly in 2006, the percentage rise in expenditures on physician services slowed markedly, due largely to a small Medicare pay increase and its private-sector fallout, according to a new report by the Centers for Medicare & Medicaid Services.

At the same time, the start of Medicare Part D had a major impact in the prescription drug sector.

Overall national health spending reached $2.1 trillion, up 6.7% from $1.97 trillion in 2005, states the CMS report, published in the January/February Health Affairs. The 2005 growth rate was 6.5%.

This moderate increase was possible because of a broad-based slowdown in spending growth in many categories, including physicians and clinical services. These expenditures increased by 5.9% in 2006, down from 7.4% in 2005, found the report, "National Health Spending in 2006: A Year of Change for Prescription Drugs." For the first time since 1999, physician spending increased more slowly than the gross domestic product.

The small size of Medicare's physician payment update in 2006 played a role in the decelerating physician spending, said Cathy Cowan, a CMS economist and one of the report's co-authors. "[Physician and clinical] price growth slowed significantly, in part, due to the Medicare payment update, which was 0.2%, and the impact of private payers somewhat following Medicare's lead," Cowan said.

Private health plan expenditures on physicians and clinical services -- which account for two-thirds of such outlays -- increased 6.1% in 2006, compared with 8.3% in 2005. Medicare spending on physicians and clinical services, which is 21% of such expenditures, grew by 6.6% in 2006, down slightly from 6.8% in 2005.

But preliminary 2007 data indicate that 2006's slower pace of spending on physicians may be an anomaly, Cowan said. "We're seeing that the growth of prices for physician services is inching back to the previous level."

A six-month Medicare physician update in 2008 of just 0.5%, paired with a 2.1% increase in practice costs as measured by the Medicare economic index, means physicians will need to look for new revenue, said Jim King, MD, president of the American Academy of Family Physicians. For example, he expects more doctors to offer profitable services, such as cosmetic surgery, and to reconsider offering obstetric services and seeing hospital patients.

While most major categories of health outlays saw slower growth in 2006, spending on prescription drugs increased for the first time since 1999. It grew from 5.8% in 2005 to 8.5% in 2006.

The 2006 launch of Medicare Part D, which gave many seniors and people with disabilities access to affordable drugs for the first time, is largely responsible. Medicare was the source of just 2% of funds for drug benefits in 2005. In 2006, its share rose to 18%, according to the CMS report.

When spending on Part D is taken out of the equation, Medicare spending increased by just 6% in 2006, down from the 9% increase in 2005. Enrollment in fee-for-service Medicare declined by 3.8%, to 34.5 million, Cowan said.

The 2006 shift of prescription coverage from Medicaid to Part D for the 6 million people eligible for both Medicaid and Medicare helped to boost overall drug expenditures, the report found. That's because state Medicaid drug price rebates averaged 30%, while Part D rebates were between 5% and 10%, according to CMS chief actuary Rick Foster. He cautioned, however, that this likely was balanced somewhat by Part D enrollees who previously did not have drug coverage and paid retail price before but now get a lower price through Medicare.

The shift in drug coverage from Medicaid to Medicare Part D also helped account for an overall drop in state and federal spending on Medicaid of 0.9% in 2006. This is the first drop in the program's history, Cowan said.

But when the change in prescription drug policy is factored out, 2006 Medicaid spending increased 5.6%. This is still lower than the 8.0% boost in 2005. Slower enrollment growth and continued state cost-containment efforts, such as eligibility cuts and increased fraud and abuse monitoring, helped to depress expenditure growth.

Another sector that showed major change was spending on public and private health plan administrative costs. This was the fastest-growing expense in 2006, with an 8.8% increase -- more than twice the 2005 growth of 3.6%. The spike was tied to the cost of getting Part D off the ground and a 25% growth in private Medicare health plan enrollment, to 7.1 million.

Spending on the Medicare Advantage plans is controversial. They were paid 12% more than Medicare spent on each senior's care in 2006.

Last year Democrats in Congress were unable to pass legislation to reduce payments to private Medicare plans to fund a larger Medicare physician update this year. Debate on this issue is expected to resume this year.

Spending pace could increase

Although national health spending increases have been relatively stable in recent years, there are a few reasons that trend is not expected to continue, said Paul Ginsburg, PhD, president of the Center for Studying Health System Change.

The hospital sector has been expanding capacity by adding specialty facilities. Also, entrepreneurial physicians are forming ventures to open facilities offering imaging and tests, Dr. Ginsburg writes in "Don't Break Out the Champagne: Continued Slowing of Health Spending Growth Unlikely to Last," in the January/February Health Affairs. Dr. Ginsburg wrote that the delayed impact of the 2001 recession may be ending, signaling the start of another round of higher health spending increases.

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Slowdown on the physician front

Growth in spending on physician and clinical services was lower in 2006 than the growth in overall national health expenditures and in the gross domestic product.

National health expenditures9.1%8.0%6.9%6.5%6.7%
Gross domestic product3.4%4.7%6.6%6.4%6.1%
Physician and clinical services7.9%8.5%7.3%7.4%5.9%

Source: Centers for Medicare & Medicaid Services, Office of the Actuary, National Health Statistics Group, January

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Part D alters spending

The implementation of Medicare Part D in 2006 gave millions of beneficiaries access to affordable drugs for the first time. Meanwhile, prescription coverage for dual-eligibles shifted from Medicaid to Part D. When drug spending is taken out of the picture, spending growth on Medicare and Medicaid benefits slowed.

Growth in benefit spending:

2005 with prescription drugs9.1%7.3%
2005 without drugs9.0%8.0%
2006 with drugs16.9%-1.3%
2006 without drugs6.0%5.6%

Source: Centers for Medicare & Medicaid Services, Office of the Actuary, National Health Statistics Group, January

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