Medicare Compliance & Reimbursement

Reduced growth stirs up mixed emotions among industry leaders

The 7.9 percent rise in health care spending during 2004 offers some consolation--this marks the second straight year that the spending growth rate for health care has been on the decline. Industry leaders, however, have mixed opinions on what conclusions to draw from the spending slowdown.

Health care spending was $1.9 trillion in 2004--$6,280 per person, according to an annual report the Centers for Medicare & Medicaid Services’ Office of the Actuary released Jan. 10. The 7.9 percent healthcare spending growth rate has slowed from 9.1 percent in 2002 and 8.2 percent in 2003.

“This report confirms that consumers are benefiting from the widespread adoption of health insurance plans’ prescription drug tools and techniques,” maintains Karen Ignagni, America’s Health Insurance Plans president and CEO. “Increased access to generics, tiered formularies, step therapy and mail-order programs have become an integral part of health benefits packages and are helping meet consumers’ demand for more affordable medicine,” notes Ignagni.

Take the slowdown with a grain of salt, counters the Urban Institute’s Robert Berenson. The increase is still “two to three times the underlying cost of living and nobody’s got an idea what to do about it,” he argues.

Prescription Drug Spending Plays An Integral Role In Slowing Aggregate Spending

CMS attributes much of the growth rate’s reduction to changes in prescription drug use and hopes to see this trend continue. “As we move forward, the new Medicare law and the new prescription drug coverage will help even more to keep costs in line while improving quality,” contends CMS administrator Mark McClellan.

The growth rate for prescription drug spending decelerated to 8.2 percent in 2004, CMS reports--down from 10.2 percent in 2003 and 14.3 percent in 2000-2002. Weighing in at 11 percent of the nation’s health care spending growth, prescription drug spending in 2004 accounted for less than its share of aggregate spending growth in recent years. In relation to the growth in personal health care spending, prescription drugs’ cost share has declined from 23 percent during 1997--2000 to 14 percent over 2002--2004. Plus, private health insurance spending growth for drugs in 2003 and 2004 was less than out-of-pocket drug spending.

Growing popularity in low-cost, generic drug use through tiered health plans helped contribute to prescription drugs’ spending slowdown, the report indicates. Over-the-counter anti-ulcerants and antihistamines are growing in popularity, and mail-order drug dispensation is on the rise. Furthermore, consumer safety concerns led to reduced consumption of certain medications.

Hospital, Physician, SNF Spending Growth Temper Aggregate Slowdown

Increased spending in other health care areas offset the aggregate growth rate’s decline, leading to speculation about where to focus spending efforts going forward.

Hospital spending accounted for 30 percent of overall spending but was responsible for 33 percent of aggregate spending growth. Medicare and Medicaid hospital spending growth further increased public spending for hospital care from 6.2 percent in 2003 to 7.9 percent in 2004. In addition, hospital spending accounted for 38 percent of the growth in personal health spending--up from 28 percent between 1997 and 2000.

Physician spending showed nominal growth, up from 8.6 percent in 2003 to 9.0 percent in 2004. However, public spending jumped from 8.9 percent in 2003 to 9.9 percent in 2004; CMS attributes most of this growth to increased Medicare service use. Public physician spending accounted for 25 percent of personal health spending growth between 1997 and 2000 to 29 percent by 2004.

Increased payments for physicians, health plans and other providers also increased Medicare-related public spending growth. These increases are in line with the Medicare Prescription Drug, Improvement and Modernization Act of 2003 and raised 2004 Medicare spending growth more than 2 percentage points to 8.9 percent.

Medicare spending on skilled nursing facilities rose 4.3 percent in 2004; however, Medicaid remains SNFs’ largest funding source, accounting for nearly 40 percent of SNF spending. Restrictions on upper payment limit financing methods slowed Medicaid nursing home spending from 5.9 percent during 2000--2002 back down to the average 3.2-percent growth that was typical before 2000.

“While the growth rate is declining, the cost of health care continues to be a concern for government, business, individuals and families,” notes Health and Human Services secretary Mike Leavitt. “We must build on steps already taken--the new Medicare prescription drug benefit, advancing health information technology and encouraging a prevention-oriented society--to find innovative, market-based ways to control costs.”

“While this report finds important progress on some fronts, it also demonstrates the need for further work in improving the affordability of health care,” adds Ignagni. “Medical liability reform remains an unfulfilled promise to consumers who continue to shoulder the heavy financial burden of frivolous lawsuits and the widespread practice of defensive medicine in hospitals and physician offices.”