OVERALL HEALTH CARE COST GROWTH PROJECTIONS SLOW FROM 2003 MEDICARE DRUG COVERAGE EXPECTED TO LOWER PRICES
The rate of health care spending in the United States is projected to grow 7.5 percent in 2004, down from the 7.7 percent growth experienced in 2003, according to a report issued today by the Centers for Medicare & Medicaid Services (CMS).
Total health care spending is projected to be $1.8 trillion in 2004. The new Medicare prescription drug benefit, to begin in 2006, is expected to significantly increase prescription drug use and reduce out-of-pocket spending for seniors without causing any major increase in the health care spending trend.
In particular, the Medicare Part D drug benefit, a key component of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA), is expected to result in less price growth and faster utilization growth in 2006-2011.
The authors estimate that “price discounts associated with the new benefit will nearly offset the increased utilization associated with extending insurance coverage to the Medicare population.” Increased Medicare drug spending is projected to add only 0.5 percentage points to the total drug spending growth rate in 2006, all resulting from greater utilization of prescription drugs due to lower drug prices and better drug coverage.
Modestly lower health care spending growth in 2004 would follow a steep deceleration in 2003, which, in turn, followed six years of acceleration in spending growth from 1996 through 2002. Growth at this somewhat lower rate is projected to continue through 2006, with health care spending growth projected to be 7.3 percent in 2005 and in 2006.
As a percentage of Gross Domestic Product (GDP), health care spending is expected to reach 15.4 percent in 2004, up from 15.3 percent in 2003, according to the report prepared by the CMS Office of the Actuary and published on-line today by the journal Health Affairs . The report is also the subject of a press conference and webcast today, sponsored by the Kaiser Family Foundation.
By 2014, health care spending growth is expected to slow to 6.7 percent, and spending in the United States is projected to reach $3.6 trillion, about 18.7 percent of GDP. From 2003 to 2014, health care spending is projected to grow 7.1 percent per year on average.
The major impact of the new benefit is expected to be a shift in source of payment for prescription drugs. In 2006, Medicare drug spending is projected to constitute 28 percent of total drug spending, up from 2 percent in 2005. This shift contributes to the forecasted increase in public health care spending as a share of total health care spending, which is projected to reach 49.4 percent by 2014, up from 45.7 percent in 2004.
While Medicare is anticipated to pay for a much larger portion of prescription drug spending in 2006, the share paid for out-of-pocket by consumers, by Medicaid, and by private health insurance is expected to fall significantly. These three payers are projected to account for 94 percent of prescription drug spending in 2005, and are expected to account for just 68 percent in 2006.
While total health care spending is projected to grow steadily in 2004, private and public spending growth patterns are expected to change. Private health care spending is projected to fall to 7.4 percent in 2004 from 8.6 percent in 2003, which is driven almost entirely by slower growth in medical care utilization. Public health care spending is projected to accelerate to 7.6 percent in 2004 from 6.6 percent in 2003. This acceleration is predominantly due to Medicare spending growth, reflecting changes associated with MMA distinct from the prescription drug benefit. In particular, the primary factor is higher spending on physicians and other health care providers under Medicare Parts A and B.
Per-enrollee private health insurance premium growth is expected to fall significantly, from 9.9 percent in 2003 to 7.7 percent in 2004. The deceleration is due to both the projected continued slowdown in underlying medical costs per-enrollee and the modest downturn in the underwriting cycle in 2004.
Out-of-pocket spending growth is expected to slow, up 6.7 percent in 2004 after growing 7.6 percent in 2003. Out-of-pocket spending is projected to decrease 1.5 percent in 2006 due to the new Medicare prescription drug benefit and then increase steadily until 2014.
Medicare spending growth is projected to increase in 2004 due to several changes to Medicare under MMA, specifically positive physician payment updates, higher Medicare Advantage payment rates (formerly Medicare + Choice), higher inpatient hospital payments to rural hospitals, and postponement of therapy caps from 2004 to 2006. As a result, Medicare spending is projected to grow 7.9 percent in 2004 and 8.5 percent in 2005 after growing 5.8 percent in 2003.
Medicaid spending is expected to grow 7.9 percent in 2004, up from 7.1 percent in 2003. The acceleration is due to increased payment rates and expanded services in some states, despite continuing pressure on states’ budgets. Medicaid enrollment is projected to increase 2.4 percent in 2004, down from 5.0 percent in 2003.
Prescription drug spending is expected to continue its slowdown, which began in 2000. Prescription drug spending growth is expected to be 11.9 percent in 2004 and slow to 8.7 percent by 2014. The deceleration is due to slower growth in drug prices, greater use of generic drugs, and increased use of multi-tiered co-payments and other steps to manage drug benefit costs. With the slowdown in prescription drug spending growth, hospital care will remain the largest share of health care spending, at 28.1 percent of total spending in 2014 compared to 14.5 percent for prescription drugs.
Hospital spending growth is projected to accelerate in 2004 to 7.0 percent, after a slowdown in 2003, when hospital spending growth was 6.5 percent. Private sector hospital spending is projected to decelerate from 8.4 percent growth in 2003 to 6.5 percent growth in 2004, due to no acceleration in price growth and a deceleration in utilization growth. The slowdown in utilization is due to the re-introduction of utilization management tools and the incorporation of some inpatient cost sharing. Public sector hospital spending growth is projected to increase from 5.3 percent in 2003 to 7.3 percent in 2004, with accelerations projected to occur in both Medicare and Medicaid.
Home health spending growth is expected to sharply increase to 13.0 percent in 2004 from 9.5 percent in 2003 due to large anticipated increases in Medicare and Medicaid spending. Nursing home spending growth is expected to slightly accelerate to 4.2 percent in 2004 from 4.0 percent in 2003, with a deceleration in private spending and acceleration in public spending. It is expected the aging of the population will lead to accelerations in spending for both home health and nursing homes over the last several years of the projection.
“While providing much greater access to drugs and modern medical care, the new Medicare benefits are not projected to significantly increase medical cost growth, and they will significantly reduce out-of-pocket spending by seniors,” said CMS Administrator Mark B. McClellan, M.D., Ph.D. “We intend to use the tools provided by the new Medicare law to increase efficiency and get even more for our health care spending.”
The MMA includes a number of innovative and important cost saving measures. Competition among plans providing the drug benefit and the Medicare Advantage package of services is expected to drive prices for drugs downward and control costs for hospital and physician services as well, and the Medicare prescription drug discount card has been found in many independent studies to result in discounts on brand-name drugs that usually exceed 20 percent, and discounts on generic drugs that usually exceed 40 percent. Medicare is also implementing pilot programs for “performance-based” payments, to further encourage higher quality and lower costs.
Other cost saving provisions include required competitive acquisition for durable medical equipment; significant reforms to the purchasing of outpatient drugs under Part B; limited Medicare payments for ambulatory surgical centers, clinical diagnostic laboratory tests, and home health agencies; improved CMS ability to make collections from other payers; indexing of the Medicare Part B deductible to inflation.
CMS is leading the health insurance industry in promoting the use of health information technology to provide better quality of care, avoid unnecessary costs, and improve the efficiency of the Medicare program. CMS also is pursuing initiatives to support better care coordination for patients with chronic illnesses. And Medicare has added three new significant benefits in 2005: cardiovascular screening blood tests and diabetes screening tests for all Medicare beneficiaries; and the “Welcome to Medicare” preventive physical examination
The health care spending projection data can be found on the CMS web site at http://www.cms.hhs.gov/statistics/nhe.