|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
TRENDSHealth Spending Growth Up In 1999; Faster Growth Expected In The Future
Spending for health care reached $1.2 trillion in 1999, up 5.6 percent from the prior year (Exhibit 1
Health spending since 1993 averaged annual increases of 0.5 percentage point less than that of gross domestic product (GDP). This resulted in a slight decline in health spendings share of GDP (Exhibit 3
The private share of health spending grew between 1997 and 1999, offsetting public-share declines caused primarily by slower Medicare spending growth (Exhibit 4
When adjusted for general economywide inflation, real health spending grew 4.1 percent in 1999nearly one percentage point faster than in the 19931998 period and two percentage points slower than in the 19881993 period.3 Between 1999 and 2010 real health spending is projected to grow 4.3 percent per year on average.
During the early 1990s employers countered growing health benefit costs by moving to more restrictive and less costly managed care plans. By 1999, 91 percent of enrollees in employer- sponsored health plans had managed care arrangements, up from 27 percent in 1988 (Exhibit 5
Combined with efforts to combat fraud and abuse in the Medicare program and the early impacts of the Balanced Budget Act (BBA) of 1997, this caused slower spending growth, predominantly through a drop in medical-specific price growth (Exhibit 6
Recent trends in utilization and prices suggest that restraints on care are subsiding. In the late 1990s consumers desire for more choice led to a shift in enrollment from health maintenance organizations (HMO) plans to less-restrictive preferred provider organization (PPO) and point-of-service (POS) plans. This shift was bolstered in part by strong growth in household income, which enabled consumers to afford the larger out-of-pocket payments associated with these plans. The tight labor market also led employers to use less restrictive plans to attract and retain employees. As a result, growth in utilization factors increased slightly in 1999 compared with the prior five-year period. From 1999 through 2002 overall spending is projected to accelerate, driven in part by rising provider costs, insurers inability to negotiate increasing price discounts as obtained in the 19931998 period, and greater income growth. Growth in more restrictive health plans is expected to decline over the next few years as economic growth remains strong and the labor market remains tight. After 2002 we project a move back toward more restrictive health plans as economic growth slows, private health insurance premiums premiums rise, and employers again search for ways to control costs. Between 2002 and 2010 we project medical price growth to stabilize at 4.2 percent per year, slightly above that of the 19931998 managed care period but well below the rapid increases of the 1980s.
Economic growth in recent years produced federal budget surpluses, moderate increases in employment, the lowest unemployment rate in almost three decades, and further increases in consumer earnings. This prosperity resulted in a drop in the number of uninsured Americans in 1999the first such decline since 1987and an increase in the number of privately insured persons.6 This latter number is projected to grow, although at a slower rate in the latter part of the projected period than in 19992001, when economic growth was most rapid.
Private health insurance.
Insurance premiums increased faster in 1999 (6.5 percent) than in the 19931998 period (5.0 percent annual average growth). Premiums accounted for $401.2 billion of health spending, compared with $355.3 billion for benefits paid (Exhibit 7
We anticipate continued near-term acceleration in health insurance premiums9.3 percent in 2000 and 10.5 percent in 2001.7 During these two years premium growth is projected to outpace benefit growth, driving the net cost as a percentage of total premiums up to 12.0 percent in 2001. Medicaid and SCHIP. Between 1994 and 1998 Medicaid coverage declined from 10 percent to 8.4 percent of the nonelderly population, affecting about 1.9 million children and 1.2 million adults.8 This decline was the result of strong job growth and the implementation of welfare-to-work policies that delinked Medicaid eligibility from eligibility for Temporary Assistance for Needy Families (TANF).9 Following these changing Medicaid eligibility rules and a spillover effect from outreach efforts under the State Childrens Health Insurance Program (SCHIP), total Medicaid spending accelerated in 1998 (7.5 percent) and 1999 (8.9 percent). Medicaid spending is projected to grow less in 2000 2002 than in 1999, in large part the result of slower growth in hospital spending as disproportionate-share hospital (DSH) caps are lowered. By 2010 Medicaid spending is projected to account for 16.8 percent of national health spending, up from 15.4 percent in 1999. Through SCHIP, a joint federal/state program, spending to provide insurance for children in low-income families also increased. Fifty-three separate SCHIP programs were operational during fiscal year 1999, up from thirty-nine in FY 1998. Coverage in these plans nearly doubled between December 1998 and December 1999, when more than two million children were enrolled.10 Total spending for SCHIP in 1999 amounted to $2.5 billion, with federal funds accounting for almost 70 percent. By 2010 total expenditures for SCHIP are expected to be $14.7 billion.
Spending on prescription drugs rose 16.9 percent in 1999, to $100 billion. Total expenditures in this category are a small (9.4 percent in 1999) but rapidly growing portion of personal health spending. We expect this share to continue to rise over the next decade, with drug spending increasing 12.6 percent per year on average, ultimately reaching 16.0 percent of personal health spending in 2010. Spending drivers. Factors that propelled expenditures at double-digit rates since 1995 are likely to continue to drive drug spending over the next decade. Perhaps the most significant was proliferation of health plans with low copayments for coverage of drugs. Consequently, drug spending rose, as prescription sizes increased and as the proportion of people using medications grew.11 Compounding this, an explosion of direct-to-consumer (DTC) advertising increased the demand for well-publicized drugs. As better therapies were produced, consumers substituted newer, higher-price drugs for less expensive ones. The high rate of growth in new brand-name products increases this substitution effect, and, conversely, the expiration of drug patents and more generic competition reduce it. In this vein, the expiration of several key patents by 2005 is expected to dampen price growth slightly. Since 1995 a steady shift toward health insurance plans with small out-of-pocket requirements for drugs has raised consumer demand. Corresponding growth in private health insurance payments reached 43 percent of prescription drug spending in 1999, compared with 27 percent in 1993. Public insurers also increased spending, as growth in Medicaid spending for drugs exceeded program spending growth in most years over the past decade. Increased third-party coverage reduced the out-of-pocket share of spending to 35 percent of all prescription drug purchases in 1999, down from more than half in 1993. Recently, third-party payers have attempted to slow growth in drug spending by providing incentives for consumers to use lower-cost drugs. These incentives, in the form of tiered payment schemes, incorporate different cost-sharing formulas for generic and brand-name drugs and for brand-name drugs on and off the formulary. By late 1999 nearly 70 percent of managed care plans carried three-tier prescription plans.12 Projections. We expect drug spending to rise by an anticipated 14.6 percent per year between 2000 and 2004 and a continued shift to tiered copayment systems to somewhat temper the growth in insurers costs. As a result, we project a slower rate of decline in the share of spending paid out of pocket over the next decade than was the case in 19931999. The out-of-pocket share is expected to decrease to 32.5 percent in 2002 and 29 percent in 2010. This slower pace of change has the effect of slowing drug spending growth slightly in the latter years of the projection. Rising intensity of use per capita has accounted for a large portion of the growth in drug spending. Patients are using drug therapies for longer periods of time. Increased consumption of newer brand-name drugs compared compared with lower-price generics is also supporting the high rate of spending growth. Approximately two-fifths of 1999 drug costs and a quarter of 1999 prescription use were accounted for by drugs introduced since 1992.13 Estimates of new drugs in the pipeline suggest a continued rapid pace of new drug introductions over the next decade.14 Our projection assumes a rate of new drug introductions well above the average for the 1980s to early 1990s but below the 199697 peak. Consumer demand also responded to increased drug company advertising. While growth in DTC advertising has been swift (40 percent in 1999), it remains a small portion (13 percent) of total promotional spending.15 Manufacturers mostly target physicians with free samples (52 percent of promotional spending), detail representatives to hospitals and doctors offices (31 percent), and advertise in medical journals (4 percent). Although we feel that DTC advertising will continue to grow as a share of total promotional spending, we expect that it will have a smaller effect on drug spending growth over 20012010 than it had during its initial surge in the late 1990s. Drug prices. Drug prices are directly affected by market competition, and increased patent protection has pushed drug prices higher in recent years. New drugs that were approved between 1980 and 1984 had effective patent lives averaging 8.1 years, with no possibility of extending monopoly rights. For new molecular entities approved in the late 1990s, the "base" effective patent life has been revised to 9.5 years, and, with extensions, total estimated patent life may reach 13.915.4 years.16 Recently, drug price growth has slowed relative to the 1980s and early 1990s as measured by the Bureau of Labor Statistics (BLS) Consumer Price Index (CPI). This deceleration was caused partly by growth limits that the industry imposed in the mid-1990s in response to political pressure and partly by changes in the BLS methodology to capture the impact of brand-name drugs losing patent protection.17 Additionally, the CPI does not reflect the initial effects associated with new products. For 20042005 we expect drug price growth to slow, partially due to the nearly $27 billion of brand-name drugs with annual revenues of $200 million or more likely to lose patent protection during this period.18 This compares with $15 billion likely to lose patent protection in 20002003. For the last five years of the projection we anticipate that drug prices will grow at a rate above that of the 19931998 period but below the large increases of the 1980s and early 1990s.
Home health. In the 19881996 period home health care spending grew at an average annual rate of 18.9 percent. Renewed government efforts to detect fraud and abuse in Medicare began to slow growth in home health spending from 10.1 percent in 1996 to 2.8 percent in 1997. Beginning in 1998 the Medicare interim payment system mandated by the BBA had an abrupt impact on total home health spending. This payment system imposed more stringent cost controls on home health agencies until a prospective payment system (PPS) could be established. Freestanding home health agencies saw their Medicare funding drop 34.4 percent between 1997 and 1999. The home health industrys aggregate expenditure growth fell 3.0 percent in 1998 and another 1.4 percent in 1999. Since 1996 the decline of $6.1 billion in Medicare spending for home health care was partly offset by increased Medicaid spending of $1.1 billion and $4.4 billion in total private funding. Individuals and their families and, to a lesser extent, private health insurance paid a higher share of home health services. Consumers out-of-pocket spending rose faster than overall home health spending beginning in 1996, reaching an all-time high of 27 percent of total home health spending in 1999. The implementation of the home health PPS in October 2000 is expected to bring stability to the industry over the projection period. In addition, the Balanced Budget Refinement Act (BBRA), passed in November 1999, postponed scheduled reductions in Medicare home health payments and increased per beneficiary limits beginning in FY 2000. As a result, Medicare home health spending is projected to grow 12.4 percent per year from 1999 to 2004 and to account for nearly 28 percent of total home health spending by 2010. Private spending is expected to grow from 51 percent of home health spending in 1999 to 53 percent in 2010, as strong income growth in recent years makes home health care more accessible and affordable. Nursing homes. Freestanding nursing homes continue their adjustment to the new Medicare PPS implemented in July 1998. Medicare spending growth slowed from 15.4 percent in 1997 to 6.5 percent in 1998, then fell 9.6 percent in 1999. As a result, industry wide spending growth decelerated from 6.5 percent in 1997 to 3.5 percent in 1998 and 2.3 percent in 1999. The new Medicare PPS, along with the industrys inadequate cost controls and previous rapid business line expansion that boosted capital costs, contributed to weakening weakening operating margins and some chains filing for bankruptcy protection.19 A slight increase in Medicaid funding in 1999 was not enough to alter this scenario. Consequently, consumers out-of-pocket share of nursing home spending increased in both 1998 and 1999, the first such two-year increase in out-of-pocket spending since 198183. The heavy dependence of the nursing home industry on public support prompted requests for increased funding. As a result, the BBRA increased Medicare payments for very sick patients in nursing homes and raised payments across the board for FY 2000 and FY 2001. Based on this law, Medicare spending for nursing homes is projected to grow 10.8 percent on average between 2000 and 2001. Similar to private home health spending, we anticipate that private nursing home spending will accelerate over the next few years as the lagged effect of income growth provides the ability to purchase more nursing home care, through both out-of-pocket spending and long-term care insurance. Hospitals. Hospital spending ($390.9 billion) increased by 3.7 percent in 1999, following growth of 2.6 percent in 1998.Hospital spending continued to fall as a share of personal health care spending, accounting for 37 percent in 1999, down from 41 percent in 1993. Medicare inpatient and outpatient hospital spending fell in 1998 and 1999. The BBA slowed the rate of increase for PPS hospitals and mandated payment adjustments in Medicare outpatient services. After Medicare spending on hospital care peaked at $124 billion in 1997, spending declined by $2.3 billion in 1998 (1.8 percent) as mandated cuts were absorbed, then was nearly unchanged (0.3 percent) in 1999. Almost half of the reduction in Medicare payments to hospitals between 1998 and 1999 can be attributed to BBA provisions affecting hospital-based home health care. In addition to BBA-specific impacts, Medicare inpatient spending fell as the average case-mix (reflecting the recorded average complexity of inpatient services) abruptly declined in 1998 and 1999. Although inpatient case-mix intensity normally increases somewhat each year as the treatment of less complex cases shifts to ambulatory settings, case-mix declined by 0.5 percent in each of 1998 and 1999, the first such decreases since the inpatient hospital PPS went into effect in FY 1984. These decreases were largely associated with changes in hospitals coding of admissions and appear to be related to the investigation of such practices by the U.S. Department of Justice. Medicare spending for hospital services is projected to return to a faster growth pattern over the next few years, in part because of the BBRA. The BBRA softened the impact of the BBAs changes on the nations most vulnerable hospitals, adding support for graduate medical education, reducing cuts in Medicare payments to hospitals with a disproportionate share of indigent patients, and altering some policies to help financially strapped rural hospitals. In addition, a resumption of historical case-mix growth is expected to boost Medicare inpatient hospital spending growth. Hospitals have been downsizing and consolidating over the past decade as declines in the number of community hospital beds accelerated. Community hospitals shed 31,000 beds between 1989 and 1994, and 72,000 beds through 1999.20 This occurred as managed care drove reductions in excess capacity and the move of services to ambulatory settings. Over the next ten years hospital spending is projected to become an even smaller share of personal health care spending, falling to 31 percent by 2010. Faced with changing constraints in the public sector and increasing competition from freestanding ambulatory surgical centers, hospitals successfully used their bargaining power in negotiations with insurance companies, boosting payments.21 Recent producer price data for hospital costs paid by private payers reflect these increases.22 Total hospital spending by all private sources increased by 4.7 percent in 1999, compared with growth of only 2.9 percent from public payers. The private share of hospital spending thus increased slightly to 41 percent in 1999, up from 39 percent in 1996 and 1997. Strong income growth from 1997 to 2001, higher hospital price growth, and the shift to less restrictive managed care plans are expected to boost private hospital spending growth in 20002003. Over the latter part of the projection period private growth is expected to slow as income growth slows and the shift to more restrictive managed care resumes.
The unprecedented patterns of slow spending growth and the stable health spending share of GDP characterize the recent historical estimates of national health spending. This seven year period has been marked by robust GDP growth, low economy wide inflation, and "one-time" effects caused by the shift to restrictive managed care plans and by recent legislation affecting Medicare spending. Historical estimates for 1999 signal increasing spending growth, a major part of which was driven by spending for prescription drugs. If Congress makes no change to current law, our projections suggest that health spending growth will continue at rates faster than the 1990s but slower than the previous three decades. At the same time, GDP growth is projected to slow from its recent robust pace. The result is a projected return to a rising proportion of economic resources devoted to health care. If this projected trend eventuates, it will again present society with complex choices. Growth in private-sector health insurance premiums is once again approaching double digits. At the same time, a Medicare prescription drug benefit, while not included in these projections, is at the forefront of the political agenda. The nation has clearly expressed its desire for the best possible health care, including rapid development of new medical technologies, but has not yet determined how best to meet its substantial costs.
The authors are economists (Heffler, Levit, Smith, Smith, Cowan, and Freeland) and health insurance specialists (Lazenby) in the National Health Statistics Group, Office of the Actuary, Health Care Financing Administration. Levit is director of the group; Heffler and Freeland are deputy directors. Estimates were prepared by the National Health Account historical estimates and projections teams. The authors are grateful to Richard Foster, Sharman Stephens, and Cathy Curtis for their helpful comments. The opinions expressed here are the authors and do not necessarily represent those of the Health Care Financing Administration.
This article has been cited by other articles:
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||