February 2005 | Vol. 23, No. 2

Health Care Spending in the U.S. Slows for the First Time in Seven Years

The pace of health spending growth in the U.S. slowed in 2003, marking the first deceleration in national health spending growth in seven years, a report by the Centers for Medicare & Medicaid Services (CMS) Office of the Actuary shows. The annual report is published in the January/February 2005 issue of Health Affairs.

“This is good news for the public and our health care system and is the result of changes designed to slow down the growth in spending,” said Health and Human Services Secretary Tommy G. Thompson. “But we have more to do before we can declare victory over rising health care costs.”

Health expenditures in the United States grew 7.7 percent in 2003 to $1.7 trillion, down from a 9.3 percent growth rate in 2002. On a per capita basis, health spending increased by $353 to $5,670. Health spending accounted for 15.3 percent of Gross Domestic Product in 2003, outpacing growth in the overall economy by nearly 3 percentage points.

Private payers (primarily private health insurance and payments by individuals for co-pays, deductibles, and services not covered by insurance) funded more than half of national health expenditures in 2003, or $913.2 billion. The public sector funded $766 billion, with the Medicaid program funding 16 percent of aggregate health spending, or $267 billion, nearly equaling the 17 percent, $283 billion, spent by Medicare.

Changes in public funding for health care greatly influenced overall health spending in 2003. Total public spending growth slowed significantly from 9.7 percent in 2002 to 6.6 percent in 2003. Driving this was a slowdown in Medicaid spending growth, from 12.6 percent in 2002 to 6.9 percent in 2003 and the expiration of supplemental funding provisions in the Balanced Budget Refinement Act (BBRA) and the Medicare, Medicaid and SCHIP Benefits Improvement Act (BIPA) to Medicare providers.

Private sector spending growth decelerated only slightly as compared with public spending, growing 8.6 percent in 2003 compared with 9.0 percent in 2002. Private health insurance premium growth decelerated for the first time since 1996, growing 9.3 percent in 2003, a 1.4 percentage point slowdown from the previous year. Out-of-pocket spending for health services grew 7.6 percent in 2003, at nearly the same rate as overall health spending growth. In 2002, out-of-pocket spending grew 6.0 percent.

Hospital spending, nearly one-third of total national health expenditures, also saw a slowdown in spending growth as it increased by 6.5 percent, down from 8.5 percent growth in 2002. Because hospital care comprises the largest single share of health spending, the impact of its slowing growth drove the deceleration in overall health spending.

Spending growth for prescription drugs decelerated significantly to 10.7 percent, down from 14.9 percent in 2002. Among factors contributing to this spending slowdown were: a reduction in the growth of number of prescriptions dispensed, the conversion of a popular allergy drug to over-the-counter status, several drugs losing their patent protection, and the expanded use of tiered co-payment plans. As a result, growth in the number of prescriptions sold per person slowed to 1.7 percent, about half the 2002 growth of 3.5 percent.

Spending for physician services grew 8.5 percent, up slightly from 8.2 percent growth in 2002. Private spending, which accounts for two-thirds of payments for physician services, accelerated 1.2 percentage points to 9.4 percent. Public spending decelerated from 8.1 percent to 6.7 percent primarily due to slower Medicaid growth.