National healthcare rate of spending slows, for now

National healthcare spending in 2007 increased at the slowest rate since 1998 but still grew faster than the economy at large, according to a report issued by federal auditors Tuesday.

The United States spent $2.2 trillion on healthcare in 2007, or $7,421 per person, an increase of 6.1 percent compared to 2006. Healthcare spending amounted to 16.2 percent of the gross domestic product (GDP), up from 16 percent the previous year.

{mosads}President-elect Obama and Democratic congressional leaders are poised to forge ahead with a campaign to overhaul the nation’s healthcare system this year.

The figures in the report, prepared by the Centers for Medicare and Medicaid Services’s (CMS) Office of the Actuary and published in the journal Health Affairs, paint a clear picture of the underlying problem they must resolve.

Despite a slight dip in the rate of growth in 2007, healthcare spending continues to escalate at a faster rate than the economy and than workers’ wages. In 2007, GDP grew 4.8 percent, according to the Commerce Department.

“In 2007, the cost growth overall was the lowest in quite some time,” CMS Chief Actuary Richard Foster said at a press briefing Monday. “True, we’re happy about that, but it was still 6.1 percent. How much did GDP go up in that year? How much did any of your wages increase? The 6.1 percent was still faster than GDP, so we still have the affordability problem,” he said.

“I wouldn’t expect the good news to continue,” Foster remarked.

With the country mired in a recession that could stretch into the next several years, healthcare spending is expected to eat up an even larger share of GDP in the near future.

Because the National Bureau of Economic Research dates the beginning of the recession to December 2007, the new report overlaps with that period by just one month, noted CMS statistician Micah Hartman, the lead author of the report.

The one-year reduction in the rate of growth is less significant against the background of longer-term trends: Since 2000, national health spending has increased by nearly $1 trillion. In 2000, health spending made up 13.8 percent of GDP, 2.4 percentage points lower than in 2007.

Would-be reformers must not only address rising costs and spending but determine how much of it is good and how much is bad. Some portion of the increased spending is the result of new medical technologies that save and prolong lives, while another portion is wasteful, Foster pointed out.

“With a new administration, healthcare reform is a top priority and they will try to tackle this very important issue of: How do we manage the higher cost in a way that’s affordable and a way that gets us top-quality healthcare? It’s a balancing act that, to date, the U.S. has not tried terribly hard to tackle,” Foster said.

Spending on most healthcare services, including hospital stays and physician visits, held steady or increased slightly in 2007. Home health services stood out, however, with an increase in spending of 11.3 percent. Foster noted that CMS is concerned that a substantial proportion of that cost growth could be the result of waste, fraud and abuse in Medicare.

The chief reason for the decline in the rate of growth, the report concludes, was a significantly slower increase in spending on prescription drugs due to reduced prices for both brand-name and generic drugs and to increased use of generics over brand-name medicines.

Prescription drug spending increased 4.9 percent in 2007, reaching $227.5 billion. That rate of growth was the lowest since 1963. In 2006, prescription drug spending rose 8.6 percent. Drug prices grew just 1.4 percent in 2007 compared to 3.5 percent in 2006.

Three factors had a major depressive impact on prescription drug spending by driving more patients to use cheaper generic medicines.

First, the expiration of patents on a dozen or so costly brand-name drugs led to the introduction of generic alternatives. “Blockbuster” prescription drugs such as Flonase, Pravachol, Zocor and Zoloft all lost patent protection in 2006, leading to generic competition in 2007.

Second, private insurers and public programs changed their benefit structures to encourage generic drug use.

Third, major retailers, starting with Wal-Mart, began offering 30-day supplies of generic drugs for less than $5.

In addition, safety concerns about a number of drugs prompted the Food and Drug Administration (FDA) to strengthen the warnings on its labels, leading to fewer prescriptions for such products. In all, the FDA added its strongest cautions, the so-called black-box warning, to 68 drugs in 2007.

Though the actuaries included safety concerns as a cause of lower drug spending, Hartman acknowledged, “We don’t have any way to quantify that.”

This trend will not continue at the same rate indefinitely, Foster said.

The CMS auditors also cautioned that comparisons to 2006 are skewed because of the massive spending undertaken that year to implement the Medicare Part D prescription drug benefit. In 2006, Medicare’s administrative costs leaped 62.5 percent compared to 2005. In 2007, that rate of growth was 10.7 percent.

“The ’05-to-’07 trend would be more of a flat trend” in terms of cost growth, Hartman said.

Next month, CMS will issue another report projecting health spending from 2008 to 2018.