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CONTINUED SLOWDOWN IN HEALTH CARE COST GROWTH PROJECTED IN 2005 AND 2006

Health care spending in the United States is projected to grow 7.4 percent in 2005 and 7.3 percent in 2006 surpassing $2-trillion, according to a report released today by the Centers for Medicare and Medicaid Services (CMS).  The report was prepared by the CMS Office of the Actuary and published on-line today by the journal Health Affairs.

Projections are updated each year based on the most recent available data, which is currently 2004 data.

The 7.4 percent growth rate is 0.5 percentage points less than the 7.9 percent growth observed in 2004 and represents the third consecutive year of decelerating growth and is expected to continue in 2006. 

Underlying the slowdown in national health spending in 2005 and 2006 is an expected drop in personal health care spending.  Influenced by legislated Medicare payment adjustments that are to be implemented in 2007, growth in personal health care spending is projected to fall to 7.0 percent that year.  In 2008, growth is expected to rebound to 7.5 percent, but then gradually slow over the remainder of the 10-year projection.   

Over the coming decade, with the aging of the population and changes in medical technology and utilization as the main contributing factors, national health expenditures are expected to double, growing an average rate of 7.2 percent per year.  As a result, the health share of Gross Domestic Product (GDP), 16 percent in 2004, is expected to climb to 20 percent by 2015.

Personal health care spending by the private sector is projected to decelerate slightly in 2005 to 8.0 percent from 8.4 percent in 2004.  This continuation of relatively strong growth occurs predominantly due to Medicare spending growth, reflecting changes associated with the Medicare Modernization Act of 2003 (MMA) other than the new Medicare Part D prescription drug benefit.  These include increased payments to rural hospitals, the postponement of scheduled Medicare therapy caps and a physician update payment in 2005 of 1.5 percent.  In 2006, with the introduction of prescription drug coverage in Medicare (Part D) and a slowdown

in private and out-of-pocket spending growth, public spending growth is projected to have a one-time acceleration to 11.8 percent. Over the remainder of the period, growth is expected to range between 6.5 and 7.9 percent.

Private personal health care spending growth will grow more slowly, decelerating from 7.5 percent in 2004 to 7.2 percent in 2005 due to the anticipated slowdown in medical price inflation.   Further, a shift in drug payments away from private insurance and into Medicare due to the implementation of Medicare Part D will cause growth to decelerate sharply to 3.9 percent in 2006.  However, growth is expected to rebound and peak at 7.7 percent by 2008, and then decelerate through 2015.   

The rate of increase in private health insurance premiums is also expected to slow for the third consecutive year, reaching 6.8 percent in 2005.   This deceleration of 1.6 percentage points is driven by slower growth in projected medical benefits per enrollee and also by the underwriting cycle. 

Out-of-pocket spending growth is expected to remain essentially flat in 2005, before decreasing substantially due to Medicare Part D coverage in 2006.  The out-of-pocket share of personal health care spending is expected to decline from 15.1 percent in 2004 to 12.6 percent by 2015 as growth in public spending and private health insurance spending continues to outpace growth in out-of-pocket spending.

After slowing slightly from 8.9 percent in 2004 to 8.6 percent in 2005, Medicare growth is expected to have a one-time increase of 25.2 percent when the new Medicare prescription drug coverage begins.  This is significantly less growth than had been forecast previously, as a result of new projections of the Medicare drug benefit budget cost declining by 20 percent for 2006.  Thereafter, Medicare growth is expected to slow to 5.4 percent in 2007 and then accelerate to 8.8 percent by the end of the projection period.

This projected growth pattern reflects several factors, including multiple years of projected reductions in physician payments followed by a few years of positive payment updates under the Sustainable Growth Rate system, an enrollment shift from traditional fee-for-service Medicare to managed care, and increased enrollment in Medicare as the Baby Boom generation becomes eligible for the program.

Combined federal and state Medicaid spending growth is also expected to slow, for the fourth consecutive year, to 7.7 percent.   Although Medicaid enrollment growth is expected to decelerate in 2005 to 2.1 percent growth from 4.2 percent in 2004, per enrollee spending is expected to increase 2.8 percent in 2005.  

Hospital spending growth for 2005 is projected at 7.9 percent, marking the second consecutive year growth in this sector is expected to outpace growth in total personal health care.  Private payer spending growth is expected to slow 1.1 percentage points to 8.5 percent in 2005 due to an expected slowdown in hospital price growth.  In 2006, growth rebounds to 9.0 percent and then moderates during the remainder of the period with an average of 7.9 percent.  Public payer spending growth is expected to slow in 2005 to 7.5 percent and to 5.5 percent by 2007, due to legislative adjustments to Medicare managed care payments and other factors.  Growth is expected to subsequently accelerate to 6.8 percent by 2015.

The Medicare Part D prescription drug benefit is expected to slightly lower overall growth in drug spending, despite substantially expanding coverage and reducing out-of-pocket costs for beneficiaries.  For 2007 through 2015, drug spending growth is projected to remain in the range of 8.0 to 8.4 percent.

Home health spending growth is expected to remain strong in 2005 at 13.2 percent, following 13.3 percent growth in 2004.  Public payers, particularly Medicare, drive this trend.  While growth of 15.3 percent for Medicare home health services in 2005 would mark the fifth consecutive year of double digit growth, we expect that trend to moderate and average 6.9 percent from 2007-2015.  Growth in home health services provided by Medicaid is expected to grow to 18.6 percent in 2005, and grow at an average rate of 10.9 percent between 2007 and 2015.

The health care spending projection data can be found on the CMS web site at http://www.cms.hhs.gov/NationalHealthExpendData/03_NationalHealthAccountsProjected.asp.