CMS Releases U.S. Health Spending Estimates Through 2005

Published: January 9, 2007

WASHINGTON – Health care spending growth in the United States slowed for the third consecutive year in 2005, increasing 6.9 percent compared to 7.2 percent growth in 2004 and 8.1 percent in 2003, the Centers for Medicare & Medicaid services (CMS) reported Jan. 9.

The 6.9 percent growth in 2005 marks the slowest rate of growth in health spending since 1999, when growth was 6.2 percent. Health care spending reached almost $2.0 trillion in 2005, or $6,697 per person, up from $6,322 per person in 2004.

The findings can be found in a report by CMS’ Office of the Actuary, released Jan. 9 in the Journal of Health Affairs.

      The health spending share of the nation’s Gross Domestic Product (GDP) increased only slightly, from 15.9 percent in 2004 to 16.0 percent in 2005. This constrained spending growth is due in part to the anticipated lagged effects of the 2001 recession, as well as to weaker growth in prescription drug spending.

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Growth in retail prescription drug sales decelerated for the sixth consecutive year, increasing just 5.8 percent in 2005 following 8.6 percent growth in 2004 and 10.6 percent in 2003. This slowdown was primarily due to a dramatic decrease in Medicaid prescription drug spending, along with increased use of generic drugs.

In addition, growth has been held down in recent years by the proliferation of tiered-co-payment benefit plans, which slowed the use of brand-named drugs, and a decrease in the number of new drug introductions. Total spending for prescription drugs for the year was $200.7 billion, compared to $189.7 billion in 2004. Private sources of funding, which include out-of-pocket and private health insurance spending, accounted for 73 percent of spending for prescription drugs in 2005 and grew just 6.0 percent in 2005 compared to 7.2 percent in 2004.

Spending for hospital care accounted for the largest share of overall health care in 2005, reaching $611.6 billion, with growth stable at 7.9 percent in both 2004 and 2005. The recent stabilization in hospital spending growth in recent years is due in large part to hospitals’ stronger negotiating positions and their ability to pass costs on to private payers. Private payers accounted for 43 percent of hospital spending and grew 7.6 percent in 2005, whereas public payers, which accounted for the remaining 57 percent, increased 8.1 percent in 2005.

Spending for physician and clinical services reached $421.2 billion in 2005, an increase of 7.0 percent over 2004. Payments by public sources for physician services, including Medicare and Medicaid, grew more slowly in 2005.

Most significantly, Medicaid cost-containment efforts, such as reduced or frozen payments to physicians, contributed to the slowdown. Medicare growth for physician services was 9.5 percent in 2005 (slightly slower than the 10.4 percent growth in 2004) and reflects continued increases in the volume and intensity of services.

Expenditures for freestanding home health care agencies, although a small share of total health spending (only 2.4 percent), grew the fastest among all services in 2005, increasing 11.1 percent to $47.5 billion. This is the third straight year of double digit growth, driven by strong growth in public payments, which accounted for 75 percent of total home health spending in 2005.

Growth in freestanding nursing home expenditures increased 6.0 percent in 2005, following growth of 4.1 percent in 2004, to $121.9 billion.  Medicaid, representing 44 percent of funding for nursing home care, grew 3.9 percent in 2005. Medicare increased 12.0 percent in 2005 after increasing 16.2 percent in 2004, due in part to slower growth in the use of Medicare skilled nursing facility services and in Medicare payment per day.

Growth in overall public spending, 7.7 percent in 2005, outpaced overall private spending growth of 6.3 percent. Public spending growth has exceeded growth in private spending in each of the last two years, primarily due to strong growth in Medicare spending, and now accounts for 45 percent of total health spending.

Medicare spending rose 9.3 percent to $342.0 billion in 2005, following growth of 10.3 percent in 2004. Although growth remained strong, the deceleration was driven by slower growth in spending for hospital care, physician and clinical services, and nursing home and home health care.

From 2000-2003, average annual Medicare spending growth was 8.1 percent and was fueled by changes associated with recently enacted legislation (Balanced Budget Refinement Act of 1999, Benefits Improvement and Protection Act of 2000, and Medicare Modernization Act of 2003).

Medicare spending for prescription drugs grew 19.7 percent in 2005, and although it outpaced overall Medicare growth, it represented only a 1.2 percent share of total Medicare spending and does not include expenditures associated with the full Part D prescription drug benefit, which did not begin until January 1, 2006.

Medicaid spending growth continued the deceleration that began in 2002, increasing 7.2 percent to $311 billion in 2005, compared with 7.5 percent in 2004. Efforts by states to implement cost containment initiatives, such as provider payment cuts or freezes, pharmacy cost and usage controls, increased fraud and abuse control activities, and greater use of disease or case management programs, contributed to the slowdown.

For the $1,085 billion spent by private payers in 2005, private health insurance contributed $694.4 billion (64 percent), out-of-pocket payments contributed $249.4 billion (23 percent), and other private funds made up the remaining $141.2 billion (13 percent).

Growth in private health insurance premiums slowed from 7.9 percent in 2004 to 6.6 percent in 2005. This was the third straight year of slowing premium growth from a peak of 10.5 percent in 2002. Employer-sponsored private health insurance accounted for 94 percent of total premiums in 2005, with the employer share growing slightly to 74.4 percent and the employee share dropping slightly to 25.6 percent. However, employees are paying more through mechanisms such as higher coinsurance, more deductibles, and changes in coverage criteria.

Out-of-pocket payments accelerated slightly in 2005 (from 5.0 percent in 2004 to 5.8 percent in 2005). However, because growth in out-of-pocket expenditures was slower in 2005 than for overall health spending (6.9 percent), the out of pocket share of total health spending fell slightly in 2005.


Centers for Medicare & Medicaid services (CMS) press release

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