No Surprise U.S. Health Care Spending Continues to Rise

After a brief slowdown, health care inflation in the U.S. is once again on the rise despite an overall drop in personal health care spending and the lowest rate of growth for private health insurance since 1997.

Health care spending grew by 6.7 percent in 2006 to $2.1 trillion, or $7,026 per person, according to research published in the journal Health Affairs. That growth rate was slightly more than the 6.5 percent seen in 2005, and the dollar figure represents the largest per capita cost in the world.

Health care inflation peaked in 2002 at 9.1 percent and then began trending downward until this year. Still, the 6.7 percent growth seen in 2006 is still nearly half as much as the 13 percent annual growth that was seen in 1980, according to the federal government’s national health expenditures as compiled for the article “National Health Spending in 2006: A Year of Change for Prescription Drugs.”

Researchers believe that the increase in health care cost inflation is due to the sharp rise in prescription drug use, fueled by the enrollment of seniors into Medicare Part D. Investment in drug research and increases in the cost of administering health insurance offset slowdowns in health care spending in other areas.

Personal health care spending, which accounts for things like the cost of health insurance and out-of-pocket costs on medical goods and services, rose 6.6 percent in 2006, slightly less than the 6.8 percent increase seen in 2005. An 18.7 percent increase in Medicare, its largest since 1981 and attributable mainly to the introduction of a prescription drug benefit, was largely offset by reductions in spending in Medicaid and a slowdown in the increase of private insurance.

Medicaid costs decreased by 0.6 percent in 2006, the first decline since the program’s inception in 1965.

The cost of private health insurance rose at 5.5 percent, its slowest rate since 1997. According to the article by Aaron Catlin and colleagues in Health Affairs, a reduction in prescription drug spending among people with private health insurance largely contributed to the slower growth rate.

Out-of-pocket spending continued its steady decline that began in 1998 when spending on deductibles, co-insurance and payments from health savings accounts totaled about 15 percent of national health spending. In 2006, out-of-pocket costs totaled 12 percent of national health spending, which equaled an annual growth rate of 3.8 percent.

Nonetheless, when out-of-pocket health care costs are combined with premiums, the household burden of financing health care has remained flat as a share of personal income since 2003, according to the authors of the study.

In a companion article in Health Affairs, Paul Ginsburg, president of the Center for Studying Health System Change, argued that the slight slowdown in personal health care spending would not last.

Citing a number of reasons, from the increase in obesity to a quickening of the “medical arms race” to a slowdown in the economy, Ginsburg says that it would be a “stretch to conclude that the corner has been turned in dealing with the long-term gap between growth in health spending and growth in income and the resulting financial pressures.”

The cost-trend data reported in Health Affairs comes amid other reports that signal health care premiums will remain stable in 2008.

A survey of nearly 3,000 employers by Mercer published in December showed that group health plan costs rose 6.1 percent in 2007, the third consecutive year of increase. In 2008, survey respondents expect costs to increase an average of 5.8 percent after taking into account changes they will make in plan designs as well as other factors.

—Jeremy Smerd