Health Spending Growing Faster than Economic Growth

Health spending in the United States grew 6.1% in 2007, to $2.2 trillion or $7,421 per person. This was the slowest rate of growth since 1998 and 0.6% lower than the growth of 6.7% in 2006 according to a report by the Centers for Medicare and Medicaid Services (CMS). Health care spending, however, continues to outpace overall economic growth, which grew by 4.8% in 2007.

The slower growth in 2007 was attributed to slower growth in retail prescription drug spending and Medicare spending associated with administering Medicare benefits. Even as health care spending growth slowed, the health spending share of the nation’s gross domestic product continued to climb, reaching 16.2% in 2007.

Retail prescription drug spending grew 4.9% in 2007, slower than the 8.6% growth in 2006. The deceleration in 2007 was the result of several factors, including sustained growth in the generic dispensing rate, slower growth in prescription drug prices and growing consumer concerns for drug safety.


The generic dispensing rate continued to climb in 2007 as several major drugs lost patent-protection. This continued growth in the use of generics contributed to both a deceleration in total expenditures as well as prices.

Prescription drug prices grew 1.4% in 2007, slower than the 3.5% growth in 2006. This lower price growth was not only driven by the increased use of generics but also by the introduction and continuation of generic drug discount programs by retail chain stores.

Increased safety concerns for certain prescription drugs in 2007 also likely influenced the drug spending trend, as the Food and Drug Administration issued 68 “black-box” warnings compared to 58 in 2006.

With the exception of prescription drugs, spending for most other health care services grew at about the same rate or faster than in 2006. Hospital spending, which accounts for about 30% of total health care spending, grew 7.3% in 2007, compared to 6.9% in 2006. The 2007 increase was partially driven by strong growth in Medicaid spending. In contrast, Medicare spending growth for hospital services remained stable at 4.6%, reflecting slower growth in fee-for-service (FFS) inpatient and outpatient use; however, there was strong growth in Medicare managed care hospital spending due to an increase in the number of beneficiaries enrolling in Medicare Advantage plans.

Physician and clinical services’ spending increased 6.5% in 2007, the same rate of growth as in 2006. When examined separately, rates of spending growth for physicians and clinics revealed disparate trends. Spending growth for physician services slowed, partly due to a legislated reduction in Medicare payments to physicians for imaging services that took effect in 2007, and also due to a decrease in use. Spending growth for clinical services outpaced physician spending growth, as outpatient services in stand-alone clinics and urgent care centers continued to increase.

Spending growth for both nursing home and home health services accelerated in 2007. For freestanding nursing homes, spending grew 4.8% in 2007 compared to 4% growth in 2006. Spending growth for freestanding home health care services increased to 11.3% in 2007.

Total health care spending by public programs, such as Medicare and Medicaid, grew 6.4% in 2007, a deceleration from 8.2% growth in 2006. In comparison, health care spending by private sources of funds grew 5.8% in 2007, compared to 5.4% growth in 2006.

Medicare spending grew 7.2% in 2007, following the 18.5% growth in 2006 that resulted from the one-time implementation of Medicare Part D. Spending growth for FFS Medicare slowed to 3.6% in 2007, while Medicare Advantage Plan (MA) spending increased 23.3%, largely due to a shift in enrollment as beneficiaries switched from traditional FFS into MA plans.

Total Medicaid spending grew 6.4% in 2007, following the first spending decrease in the program’s history in 2006 of -0.7%. The increase in 2007 marked the return to a more “normal” growth trend following the one-time impact of the introduction of Medicare Part D in 2006. Medicaid spending growth for hospital care, home health care, dental care and physician and clinical services all accelerated in 2007 as states increased provider payments and continued to provide home and community-based services as less-costly alternatives to institutional care. Medicaid spending declined in 2007 for prescription drugs (-1.8%) and other professional services (-1.2%) as states continued to successfully use cost-containment strategies to control growth in these areas.

CMS found that overall private health insurance premiums grew 6% in 2007, the same rate as in 2006, but much lower than the recent peak of 10.7% in 2002. Over this period, private health insurance benefit payments also slowed, from 9.4% growth in 2002 to 6.6% in 2007. The slower growth reflects, in part, a decline in private health insurance spending on prescription drugs.

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