Lowest Growth in Healthcare Spending in 2007 since 1998

BALTIMORE—Healthcare spending in the United States grew 6.1% in 2007, to $2.2 trillion or $7,421 per person.  This was the slowest rate of growth since 1998 and 0.6 of a percentage point lower than the growth of 6.7% in 2006, according to a report by the Centers for Medicare & Medicaid Services. Health care spending, however, continues to outpace overall economic growth, which grew by 4.8% in 2007.

The slower growth in 2007 was attributed mostly to slower growth in both retail prescription drug spending and Medicare spending associated with administering Medicare benefits. Even as health care spending growth slowed, the health spending share of the nation's Gross Domestic Product (GDP) continued to climb, reaching 16.2% in 2007, up by 0.2 percentage point from 2006. 

Retail prescription drug spending grew 4.9% in 2007, slower than the 8.6% growth in 2006.  The deceleration in 2007 was the result of several factors, including sustained growth in the generic dispensing rate, slower growth in prescription drug prices, and growing consumer concerns for drug safety.

The generic dispensing rate continued to climb in 2007 as several major blockbuster drugs lost patent-protection; this continued growth in the use of generics contributed to both a deceleration in total expenditures as well as prices.

Prescription drug prices, as reflected in the National Health Expenditure Accounts, grew 1.4% in 2007, much slower than the 3.5% growth in 2006.  This lower price growth was not only driven by the increased use of generics, but also by the introduction and continuation of generic drug discount programs by large retail chain stores.

Increased safety concerns for certain prescription drugs in 2007 also likely influenced the drug spending trend, as the Food and Drug  Administration issued 68 “black-box” warnings (indication that the drug carries a significant risk of serious or even life-threatening effects), compared to 58 in 2006 and 21 in 2003.

With the exception of prescription drugs, spending for most other health care services grew at about the same rate or faster than in 2006.  Hospital spending, which accounts for about 30% of total health care spending, grew 7.3% in 2007, compared to 6.9% in 2006. The 2007 increase was partially driven by strong growth in Medicaid spending.  In contrast, Medicare spending growth for hospital services remained stable at 4.6%, reflecting slower growth in fee-for-service (FFS) inpatient and outpatient use; however, there was strong growth in Medicare managed care hospital spending due to an increase in the number of beneficiaries enrolling in Medicare Advantage plans.

Physician and clinical services' spending increased 6.5% in 2007, the same rate of growth as in 2006.  However, when examined separately, rates of spending growth for physicians and clinics revealed disparate trends.  Spending growth for physician services slowed, partly due to a legislated reduction in Medicare payments to physicians for imaging services that took effect in 2007, and also due to a decrease in use.  Conversely, spending growth for clinical services outpaced physician spending growth, as outpatient services in stand-alone clinics and urgent care centers continued to increase.

Spending growth for both nursing home and home health services accelerated in 2007.   For freestanding nursing homes, spending grew 4.8% in 2007 compared to 4.0% growth in 2006.  A major factor underlying the trend was faster price growth.  Spending growth for freestanding home health care services increased to 11.3% in 2007; this acceleration was partially due to an increase in price growth, although much of the growth continues to be influenced by non-price factors, such as use and intensity. 

Total health care spending by public programs, such as Medicare and Medicaid, grew 6.4% in 2007, a deceleration from 8.2% growth in 2006.   In comparison, health care spending by private sources of funds grew 5.8% in 2007, compared to 5.4% growth in 2006. 

Recent growth in public spending is partially attributable to health-related legislation, specifically the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA).  Under this legislation, Medicare beneficiaries gained access to Part D prescription drug coverage in 2006, which added expenditures totaling $40.5 billion into the Medicare program; however, this increase in public spending was partially offset by lower Medicaid spending for dually-eligible Medicare beneficiaries.  Additionally, MMA authorized higher payments to Medicare Advantage (MA) plans, which created incentives for those plans to expand enrollment by increasing areas of coverage and expanding the benefits offered.

Medicare spending grew 7.2% in 2007, following the 18.5% growth in 2006 that resulted from the one-time implementation of Medicare Part D.  Spending growth for FFS Medicare slowed significantly to 3.6% in 2007, while MA spending increased 23.3 percent, largely due to a shift in enrollment as beneficiaries switched from traditional FFS into MA plans.  Spending growth for MA plans is primarily due to increases in enrollment, as payments are based on plan-specific per member per month capitated rates.

Total Medicaid spending grew 6.4% in 2007, following the first spending decrease in the program's history in 2006 of -0.7%.    The increase in 2007 marked the return to a more "normal" growth trend following the one-time impact of the introduction of Part D in 2006, which shifted drug coverage for dual-eligibles from Medicaid into Medicare.  Medicaid spending growth for hospital care, home health care, dental care, and physician and clinical services all accelerated in 2007 as states increased provider payments and continued to provide in greater numbers home and community-based services as less-costly alternatives to institutional care.   Medicaid spending declined in 2007 for prescription drugs (-1.8%) and other professional services (-1.2%) as states continued to successfully use cost-containment strategies to control growth in these areas.

CMS found that overall private health insurance premiums grew 6.0% in 2007, the same rate as in 2006, but much lower than the recent peak of 10.7% in 2002.  Over this period, private health insurance benefit payments also slowed, from 9.4% growth in 2002 to 6.6% in 2007.   The slower growth reflects, in part, a decline in private health insurance spending on prescription drugs.  The ratio of the net cost of private health insurance (the difference between premiums and benefits) to total private health insurance premiums was 12.2% in 2007, compared with 12.8% in 2006.  This marked the fourth consecutive year that private health insurance benefits have grown at least as fast as private health insurance premiums.

Out-of-pocket spending grew 5.3% in 2007, an acceleration from 3.3% growth in 2006.  This acceleration was mainly due to increased out-of-pocket payments for prescription drugs, nursing home services, and nondurable medical supplies.  Out-of-pocket spending accounted for 12.0% of national health spending in 2007.  This share has been steadily declining both recently and over the long-run; in 1998, it accounted for 14.7% of health spending and, in 1968, out-of-pocket spending accounted for 34.8% of all health spending.
At the aggregate level, the shares of financing for health services and supplies by businesses (25%), households (31%), other private sponsors (4%), and governments (40%) remained relatively steady in 2007.