Press Releases


For Immediate Release: Monday, January 27, 1997
Contact: CMS Media Relations


The nation's total spending for health care increased 5.5 percent in 1995 to nearly one trillion dollars, an estimated average of $3,621 per person, according to a report released today by HHS Secretary Donna E. Shalala.

The report also shows that spending grew faster for Medicare than the private sector, primarily because the private sector has garnered greater savings from managed care. Medicare by law must base its managed care payments on a formula related to Medicare fee-for-service costs. Therefore, under current law, Medicare may not benefit from discounts and other factors that generate savings for the private sector. This is a primary reason why private sector spending grew at a rate of 2.9 percent in 1995 while public sector spending grew 8.7 percent in that year, says the report. It was released by Shalala at a meeting of the American Hospital Association.

"Public programs must become more prudent purchasers of health care services," said Shalala. "President Clinton's Medicare reform proposals will do just that."

"The fact that Medicare spending continues to increase more rapidly than private insurance is a major concern as we seek to delay the depletion of the Medicare Hospital Insurance Trust Fund predicted to occur in early 2001," said Bruce C. Vladeck, Administrator of the Health Care Financing Administration, which oversees the Medicare and Medicaid programs.

National health expenditures in 1995 were $988.5 billion, up from $937.1 billion in 1994. The growth rate for health spending in 1995 was slightly higher than the 5.1 percent increase registered in 1994, while spending rose by $156 per person from $3,465 in 1994.

Growth in the nation's health care spending decelerated steadily from annual double-digit and near double-digit increases in the late 1980s and early 1990s to 6.9 percent in 1993. The lower growth rates for 1994 and 1995 are the slowest in more than three decades.

The data are in an annual report published in the fall 1996 edition of Health Care Financing Review, the quarterly journal of the Health Care Financing Administration.

After almost a decade of sharp increases, health care spending as a share of the gross domestic product (GDP) stabilized in 1993-1995 at 13.5 to 13.6 percent. The GDP is the total value of goods and services produced in the United States.

Since 1990, the share of health care spending attributed to the public sector has increased because of the different rates of growth in public and private spending, the report said. This trend is unusual because shifts from private to public shares of financing for health care over the past three decades were usually precipitated by a change in public policy that expanded health care coverage to new population groups.

Although the number of people covered by Medicaid increased, the current shift is occurring largely because of rapid changes in the private sector. Growth in private sector spending decelerated, falling steadily from 11.7 percent in 1990 to 2.9 percent in 1995. Growth in public sector spending also decelerated over the same period, but the magnitude of the deceleration was much less, from 12.7 percent in 1990 to 8.7 percent in 1995.

Rapid growth in Medicaid spending drove much of the high overall growth in public expenditures in the early 1990s, while rising Medicare spending kept growth in public spending high in 1994 and 1995.

From 1969 to 1993, the 10.9 percent annual growth in per enrollee benefits under Medicare was slower than the 12.5 percent under private health insurance. From 1993 to 1995, however, this relationship changed and average annual growth in private health insurance decelerated to 3.5 percent, while Medicare spending slowed only slightly to 9.7 percent.

Much of the slower growth in private health insurance spending can be attributed to effects of managed care, the report said. Managed care is characterized by its emphasis on preventive care, elimination of unnecessary services, negotiated price discounts, and smaller copayments and deductibles. More than half of all Americans were enrolled in managed care in 1995.

Among Medicare beneficiaries, about 10 percent were enrolled in managed care. In fact, their numbers are increasing rapidly; the number of Medicare beneficiaries enrolled in managed care grew by 108 percent from 1993 to 1997. Medicare must by law pay managed care plans 95 percent of the average cost of fee-for-service care per beneficiary in each county (the Adjusted Average Per Capita Cost, or AAPCC). Therefore Medicare has been unable to respond as quickly as private health insurers to changing market conditions.

Several studies show that Medicare beneficiaries who enroll in managed care plans have significantly lower health care costs than those who remain in the fee-for-service program. This means that paying managed care plans 95 percent of the AAPCC rate increases, rather than decreases, Medicare expenditures. That is because 95 percent of the AAPCC is more than Medicare would have paid had the beneficiary been covered under fee-for-service.

Total personal health care expenditures increased 6.1 percent in 1995, the third consecutive year of 5 to 6 percent growth rates. Expenditures for hospital care, accounting for 40 percent of personal health care, increased 4.5 percent to reach $350.1 billion in 1995. Spending for physician services, 23 percent of personal health care, rose to $201.6 billion in 1995.

Medicare and Medicaid financed 36.1 percent of all personal health care expenditures in 1995. Medicare funded $184 billion in benefits for the 37.5 million aged and disabled people enrolled in the program, 61 percent for hospital care and 22 percent for physician services.

Federal and state spending by the Medicaid program funded $133 billion for personal health care in 1995, 39 percent for hospital care and another 27 percent for nursing home care. In fiscal year 1995, 36.3 million people received care financed by the Medicaid program.

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