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Economists warn drug prices continue to speed up health spending

Fueled by a nearly 17 percent increase in prescription drug spending, expenditures for health care in the U.S. topped $1.2 trillion in 1999, up 5.6 percent from the prior year, according to government economists.

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And it's only going to get worse before it gets any better, say the experts from the Centers for Medicare & Medicaid Services (CMS) in Washington, D.C.

Premium growth will outpace benefit growth over the next few years.

In a report published March 12, 2001, in the journal Health Affairs, the economists and health insurance specialists predict a "more pronounced" acceleration in health care spending in the years immediately following 1999, the last year for which reliable data is available. Experts say consumers can expect an overall increase of 8.6 percent in 2001.

Drug spending is driving these increases, analysts say, and they will continue to grow an average of 12.6 percent a year over the next decade. According to the CMS experts, drug costs will account for 16 percent of all personal health spending by 2010.

Other factors drive up costs

While increased drug costs are largely to blame for the jump in health care spending, it is not the only factor. "This accelerated growth is driven in part by rising provider costs, insurers' inability to negotiate increasing price discounts, and greater income growth that will drive increased consumer demand," says CMS’ Stephen Heffler, deputy director of the National Health Statistics Group.

While Heffler and fellow analysts predict sharper increases in near-term health spending, they say they don't expect them to reach the levels reported in the 1980s and early 1990s before the Medicare reforms in the Balanced Budget Act of 1997 (BBA) had a chance to take effect.

Currently, annual growth in Medicare spending remains low, only 1 percent in 1999, which is well below the 9.2 percent average recorded between 1993 and 1997. However, the analysts say Medicare spending for hospital services is likely to return to a faster growth pattern than in previous years due to the Balanced Budget Refinement Act that restored payment cuts affecting hospitals included in the BBA.

Health care trends

The report also looks at other health care spending and insurance enrollment trends. They include:

  • By 1999, 91 percent of employees with employer-sponsored health insurance were enrolled in some form of managed care, up from 27 percent in 1988.
  • Health insurance premiums grew slightly faster in 1999 than in the previous five years; 6.5 percent compared to 5 percent. The analysts predict an acceleration in premiums in the near term — 9.3 percent in 2000 and 10.5 percent in 2001. They also state that premium growth will outpace benefit growth over the next few years.
  • Consumers out-of-pocket share of nursing home spending increased in 1998 and 1999, the first such two-year rise in out-of-pocket spending since the early 1980s. The analysts report that private spending for nursing home care will rise as the "lagged effect of income growth provides the people the ability to buy more nursing home care" on their own or via long term care insurance.

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