U.S. Health Care Spending Reaches $2.1T in 2006, Increasing 6.7%

U.S. health care spending in 2006 increased by 6.7% to $2.1 trillion, or $7,026 per capita, according to a CMS report published on Tuesday in the journal Health Affairs, the Washington Post reports (Lee, Washington Post, 1/8). According to the report, health care spending in 2006 accounted for 16% of gross domestic product, an increase of 0.1% from 2005 (Reichard, CQ HealthBeat, 1/8).

Prescription drug spending in 2006 increased to $216.7 billion, an 8.5% increase from 2005, the report found. Public programs -- such as Medicare, Medicaid, those operated by the Department of Defense and the Department of Veterans Affairs, and state and local hospital subsidies -- accounted for 34% of prescription drug spending, compared with 28% in 2005, before the Medicare prescription drug benefit took effect, the report found. The increase in prescription drug spending in large part resulted from the use of more medications, not higher prices, according to the report (Washington Post, 1/8).

Medicare beneficiaries who previously purchased medications out of pocket at list prices in 2006 began to receive coverage under the prescription drug benefit, and, as a result, they used more treatments, the report found (Alonso-Zaldivar, Los Angeles Times, 1/8). "Implementation of the Medicare drug benefit shifted the funding of retail drug purchases and impacted the rate of overall drug spending growth," Aaron Catlin, lead author of the report and an economist at HHS, said (Lopes, Washington Times, 1/8). Private Medicare prescription drug plans also received lower discounts on medications than state Medicaid programs, which previously provided coverage to dually eligible beneficiaries, the report found.

The report also cited the use of medications for new purposes and the increased use of biotechnology treatments (Pear, New York Times, 1/8). In addition, the report cited increased use of insomnia medications -- such as Ambien CR, manufactured by Sanofi-Aventis, and Lunesta, manufactured by Sepracor (Zhang, Wall Street Journal, 1/8).

The report found that prescription drug spending would have increased more without the use of more generic medications and the launch of programs that provide discounts on such treatments by Wal-Mart and other retail stores. Generic medications in 2006 accounted for 63% of prescriptions, compared with 56% in 2005, according to the report (New York Times, 1/8).

Medicare
Medicare spending in 2006 increased to $401.3 billion from $338 billion in 2005, and the prescription drug benefit accounted for $41 billion in Medicare spending in 2006, the report found (Washington Post, 1/8). In 2006, Medicare accounted for 18% of retail prescription drug spending, compared with 2% in 2005 (Los Angeles Times, 1/8).

CMS Chief Actuary Richard Foster said, "The source of payment for prescription drugs has changed a lot" because of the Medicare prescription drug benefit, adding, "Those are big changes. But the overall cost of prescription drugs in the U.S. has changed very little as a result of" the benefit. In addition, Foster said that Medicare spending on the prescription drug benefit remains lower than previously estimated (Washington Post, 1/8). According to the Los Angeles Times, the report "did not provide a final verdict on whether the Medicare prescription benefit is a good deal for taxpayers" (Los Angeles Times, 1/8).

Medicare spending on managed care plans in 2006 increased by 48%, in large part because of a 25% increase in enrollment and higher reimbursements for health insurers that operate the plans, according to the report (Wall Street Journal, 1/8). CMS officials said that Medicare spending for beneficiaries in traditional Medicare averaged $9,538 in 2006, compared with an average of $10,133 for those in private Medicare Advantage plans. However, according to Foster, the report does not indicate that MA plans have increased Medicare spending (CQ HealthBeat, 1/8).

Medicaid
Medicaid spending in 2006 decreased by nearly 1% to $310.6 billion, the first decline in spending since the program began in 1965, according to the report. Medicaid in 2006 accounted for 9% of retail prescription drug spending, compared with 19% in 2005, the report found.

Most of the decrease in Medicaid prescription spending resulted from a shift in coverage for many beneficiaries to the Medicare prescription drug benefit, according to Catlin. The report also cited increased state restrictions on Medicaid eligibility and frozen or reduced reimbursements for health care providers that participate in Medicaid.

In 2006, Medicaid enrollment increased by only two-tenths of 1%, the smallest rate of increase since 1998, the report found (New York Times, 1/8).

Additional Results
The report also found:

• Consumer out-of-pocket health care spending increased by 3.8% in 2006 (Washington Post, 1/8);
  
  
• Employer health care spending in 2006 increased by 5.7% to $496.8 billion (New York Times, 1/8);
  
  
• Private health insurers in 2006 reduced prescription drug spending and increased premiums by 5.5%, the smallest rate of increase since 1997, in part because of a shift in retiree medication costs from employers that provide benefits to Medicare (Washington Times, 1/8);
  
  
• Spending on physician services in 2006 increased by 5.9% to $447.6 billion, the smallest rate of increase since 1999;
  
  
• Spending on nursing homes in 2006 increased by 3.5% to $124.9 billion, the smallest rate of increase since 1999 (New York Times, 1/8);
  
  
• Spending on wheelchairs, walkers, artificial limbs and other medical equipment in 2006 increased by 2.3% (Freking, AP/San Francisco Chronicle, 1/7);
  
  
• Spending on hospital care in 2006 increased by 7% to $648 billion;
  
  
• Spending on home health care in 2006 increased by 9.9% to $52.7 billion (CQ HealthBeat, 1/8); and
  
  
• Spending on health care administrative costs in 2006 increased by 8.8%, in large part because of the launch of the Medicare prescription drug benefit (Washington Post, 1/8).

Comments
Ron Pollack, executive director of Families USA, said, "Many people involved in health care will say, 'Hey, wait a minute, 6.7% ... things are moderating,' but for average people around the country, they don't see this as moderation." He added, "People just see that health care costs are rising faster than their wages" (Los Angeles Times, 1/8).

Paul Ginsburg, president of the Center for Studying Health System Change, said, "Many factors indicate that relief for purchasers and consumers will be short-lived. Research on local health care markets suggests that rapid expansion of provider capacity and incentives to increase volume of care are continuing" (CQ HealthBeat, 1/8).

An abstract of the report is available online.

NPR's "Morning Edition" on Tuesday reported on the study. The segment includes comments from Catlin; Ginsburg; and health care consultant Bob Laszewski (Silberner, "Morning Edition," NPR, 1/8). Audio and a partial transcript of the segment are available online.

An audio-only webcast of a media briefing about the study will be available online at kaisernetwork.org after 12:30 p.m. on Tuesday.