CMS expects healthcare spending to surpass $2 billion in 2006

Sunday, February 26, 2006

WASHINGTON - Healthcare spending in the United States is projected to grow 7.4% in 2005 and 7.3% in 2006, surpassing $2 trillion, according to a report released last week by CMS.

Over the coming decade, with an aging population and changes in medical technology and utilization, national health expenditures are expected to double, growing an average rate of 7.2% per year. As a result, the health share of gross domestic product (GDP), which was 16% in 2004, is expected to climb to 20% by 2015, according to the report prepared by CMS and the journal Health Affairs.

According to the report:

The 7.4% growth rate in 2005 was 0.5% less than the 7.9% growth in 2004 and represents the third consecutive year of decelerating growth, a trend expected to continue in 2006.

Underlying the slowdown in national health spending in 2005 and 2006 is an expected drop in personal healthcare spending. Influenced by legislated Medicare payment adjustments that will be implemented in 2007, growth in personal healthcare spending is projected to fall to 7% that year. In 2008, growth is expected to rebound to 7.5% but then gradually slow over the remainder of the 10-year projection.

Personal healthcare spending by the private sector was projected to decelerate slightly to 8% in 2005 from 8.4% in 2004. This continuation of relatively strong growth occurs predominantly due to Medicare spending growth, reflecting changes associated with the Medicare Modernization Act of 2003 (with the exception of the new Medicare Part D prescription drug benefit). These include increased payments to rural hospitals, the postponement of scheduled Medicare therapy caps and a physician update payment in 2005 of 1.5%. In 2006, with the introduction of prescription drug coverage in Medicare Part D and a slowdown in private and out-of-pocket spending growth, public spending growth is projected to have a one-time acceleration to 11.8%. Over the remainder of the period, growth is expected to range between 6.5% and 7.9%.

Private personal healthcare spending growth will grow more slowly, decelerating from 7.5% in 2004 to 7.2% in 2005, due to the anticipated slowdown in medical price inflation. Further, a shift in drug payments away from private insurance and into Medicare due to the implementation of Medicare Part D will cause growth to decelerate sharply to 3.9% in 2006. However, growth is expected to rebound and peak at 7.7% by 2008 and then decelerate through 2015.

The rate of increase in private health insurance premiums is also expected to slow for the third consecutive year, reaching 6.8% in 2005. This deceleration of 1.6% is driven by slower growth in projected medical benefits per enrollee and the underwriting cycle.

Out-of-pocket spending growth is expected to remain essentially flat in 2005, before decreasing substantially due to Medicare Part D coverage in 2006. The out-of-pocket share of personal healthcare spending is expected to decline from 15.1% in 2004 to 12.6% by 2015, as growth in public spending and private health insurance spending continues to outpace growth in out-of-pocket spending.

After slowing slightly from 8.9% in 2004 to 8.6% in 2005, Medicare growth is expected to have a one-time increase of 25.2% when the new Medicare prescription drug coverage begins. This is significantly less growth than had been forecast previously, as a result of new projections of the Medicare drug benefit budget cost declining by 20% for 2006. Thereafter, Medicare growth is expected to slow to 5.4% in 2007 and then accelerate to 8.8% by the end of the projection period.

This projected growth pattern reflects several factors, including multiple years of projected reductions in physician payments followed by a few years of positive payment updates under the Sustainable Growth Rate system, an enrollment shift from traditional fee-for-service Medicare to managed care, and increased enrollment in Medicare as the baby boomer generation becomes eligible for the program.

Combined federal and state Medicaid spending growth is also expected to slow for the fourth consecutive year to 7.7%. Although Medicaid enrollment growth is expected to decelerate in 2005 to 2.1% growth from 4.2% in 2004, per enrollee spending is expected to increase 2.8% in 2005.

Hospital spending growth for 2005 is projected at 7.9%, marking the second consecutive year of growth in this sector, which is expected to outpace growth in total personal health care. Private payer spending growth is expected to slow 1.1% to 8.5% in 2005 due to an expected slowdown in hospital price growth. In 2006, growth rebounds to 9% and then moderates during the remainder of the period with an average of 7.9%. Public payer spending growth is expected to slow in 2005 to 7.5% and to 5.5% by 2007 due to legislative adjustments to Medicare managed care payments and other factors. Growth is expected to subsequently accelerate to 6.8% by 2015.

The Medicare Part D prescription drug benefit is expected to slightly lower overall growth in drug spending, despite substantially expanding coverage and reducing out-of-pocket costs for beneficiaries. For 2007 through 2015, drug spending growth is projected to remain in the range of 8% to 8.4%.

Home health spending growth is expected to remain strong in 2005 at 13.2%, following 13.3% growth in 2004. Public payers, particularly Medicare, drive this trend. While growth of 15.3% for Medicare home health services in 2005 would mark the fifth consecutive year of double-digit growth, CMS expects that trend to moderate and average 6.9% from 2007-2015. Growth in home health services provided by Medicaid is expected to grow to 18.6% in 2005 and grow at an average rate of 10.9% between 2007 and 2015.