Health care costs expected to rise to $3.1 trillion over next 10 years

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Sunday, February 9, 2003

February 10, 2003

WASHINGTON - Health care spending in the United States is projected to reach $3.1 trillion in 2012, up from $1.4 trillion in 2001, according to a report issued today by the Centers for Medicare & Medicaid Services (CMS).

The CMS report, published in an article on the web site of the journal Health Affairs, projects that for the entire 2002-2012 period, health spending is expected to grow at an average annual rate of 7.3%, compared to 6.5% during 1991-2001.

After increasing 8.7% in 2001, national health expenditure (NHE) growth is projected to be 8.6% in 2002 and 7.3% in 2003. This slowdown would follow five consecutive years of accelerating spending growth from a low of 5% in 1996. The acceleration deceleration reflects slower rates of growth in disposable personal income, medical price inflation, and Medicare spending.

As a percentage of GDP, health care spending is expected to reach 17.7% in 2012, up from 14.1% in 2001, after hovering just above 13% from 1993 through 2000. This increase reflects a combination of faster projected growth in health spending and slower GDP growth.

Per-enrollee private health insurance premiums are expected to increase by 11.6% in 2002, from 11.1% in 2001, despite a projected slowdown in underlying medical costs benefits per-enrollee from 10.8% in 2001 to 8.9 percent in 2002. This is an indication of the current phase of the underwriting cycle of reduced competitive pressures, rising premiums, and increased health plan profitability.

Out-of-pocket spending is expected to grow more rapidly over the projection period in comparison to the previous decade because of efforts by employers and insurers to share costs with employees. However, the growth rate of total health spending is still expected to be higher than the growth rate of out-of -pocket spending, causing the out-of-pocket share of total health expenditures to fall from 14.1% in 2002 to 12.9% in 2012.

Based on current law, Medicare spending growth is projected to decelerate from 7.8% in 2001 to 5.2% in 2002 and 3% in 2003 due to the expiration of many of the provisions in the Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 1999 and the Medicare, Medicaid, and SCHIP Benefits and Improvements Act of 2000, and reduced reimbursement for physicians under the sustainable growth rate system.

In 2002, Medicaid spending is expected to grow at a double-digit rate, 12.1%, for the second year in a row. High Medicaid spending growth is largely due to significant increases in enrollment in 2001 and 2002. After 2002, Medicaid spending growth is expected to remain strong, but to slow to 8.5% by 2012.

Hospital spending growth, driven by higher labor costs and increased hospital leverage in pricing, is projected to remain the most important driver of total health care spending growth in 2002, reflecting its large share of total health spending as well as projected faster growth. Hospital spending accounts for 27.1% of the projected increase in total health care spending in 2002, while prescription drug spending and physician spending account for 16.3% and 16.5%, respectively.

Spending on prescription drugs, still the fastest growing sector, is expected to continue its recent deceleration, partly due to increasingly broad use of tiered co-payments and fewer drug introductions. Between 2002 and 2012, prescription drug spending growth is projected to increase at an average annual rate of 11.1%, which exceeds projected total health spending by an average of 3.8 percentage points per year. By 2012, prescription drug spending is expected to account for 14.5% of total health expenditures, up from 9.9 percent in 2001.

Historically, spending for physician and clinical services has grown at a rate roughly similar to that of total health spending, and during the forecast period, the same pattern is expected to occur. In the near-term (2002 through 2006), physician Medicare spending growth is expected to be relatively slow due to the sustainable growth rate system, which adjusts physician reimbursement based on Medicare spending growth relative to GDP.

The health care spending projection data can be found on the CMS web site at http://cms.hhs.gov/statistics/nhe/. The Health Affairs article can be found at http://www.healthaffairs.org/WebExclusives/ Heffler_Web_Excl_020703.htm

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