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Health Care Spending Boom Continues

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The government economists who track health care spending put a curious spin on their latest report. In 2005, health care grew 6.9 percent, more than twice the rate of the overall economy. It's now officially a $1.9 trillion sub-economy, 16 percent of gross domestic product, nearly $6,700 for every man, woman and child in America.

The good news is that health care is no longer growing three times faster than the rest of the economy. But does that justify this sentence, found near the tale end of the report in the latest issue of Health Affairs (subscription required): "The current moderation in the rise of the health share of GDP indicates that at least for now, health spending is growing at a rate nearly comparable to that of the rest of the economy."

Huh? Not believing my eyes, I doublechecked the overall GDP growth rate for 2005 at the Bureau of Economic Analysis. It was 3.2 percent. I'm sorry, but if my retirement planner told me that my portfolio had grown 3.2 last year and that was "nearly comparable" to an S&P index increase of 6.9 percent, I'd fire him. Did somebody order them to write that spin?

Okay, forget their analysis. The Center for Medicare and Medicaid Services annual report is a treasure trove of information about who pays the health care tab in the U.S. Out of $1.9 trillion (think of it as 1,900 billion), the public sector (Medicare, Medicaid and federal, state and local governments) accounted for $847 billion or nearly half. Employer health insurance premiums equaled $694 billion and individual out-of-pocket expenses equaled $249 billion. Other private sources like charities make up the rest.

Significantly, public sector spending is growing faster than the private sector. Medicare spending grew 9.3 percent; Medicaid spending grew 7.2 percent; employer premiums grew 6.6 percent; and individual out-of-pocket expenses grew 6.2 percent.

Why? The report suggests the growth of publicly-funded children's health insurance programs and the start of the Medicare Modernization Act spurred public sector increases. It wasn't the drug benefit, which didn't really get going until 2006. Rather, it was the increased payments for Medicare HMOs, which are growing rapidly, and are more costly to Medicare than the traditional fee-for-service program even though they generally cover healthier Medicare beneficiaries.

I gleaned one more interesting tidbit from the report: Total public sector administrative costs came to $44 billion. Total for the private sector, which was only slightly larger as a share of the overall health care economy, was $98 billion -- more than twice as much.

On the provider side, doctors and hospitals are doing just fine, thank you, wracking up 7.9 percent gains in revenue. Drug spending, on the other hand, grew "only" 5.8 percent to about $200 billion (about 10 percent of overall health care spending), despite the withdrawal of Vioxx and Bextra, which were billion-dollar blockbusters. Don't cry for thee, AstraZeneca.

So what accounts for the unrelenting upward march of health care spending? According to the CMS analysts, increased prices were responsible for fully half the increase in spending; more intensive utilitization of health care services accounted for another third; and the aging of the population (older people use more health services) accounted for the rest.

If this quick overview of the health care sub-economy suggests anything, it is that there is probably enough money ($50 billion plus) in excessive administrative expenses in the private sector that could be recaptured to cover the uninsured. That requires switching to a single-payer system.

But once that is achieved, we're still going to have the problem of health care spending rising at twice the rate of inflation. Reining that in will require curbing the sector's pricing power and having the centralized purchaser carefully scrutinize the true medical value of expensive new technologies and paying accordingly.