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FOR IMMEDIATE RELEASE				
Tuesday, Nov. 10, 1998						    
Contact:  HCFA Press Office  (202) 690-6145

Health care spending in the United States rose only 4.8 percent in 1997, the slowest increase in almost 40 years, according to a new report released today by the Health Care Financing Administration. HCFA reports that health care spending in 1997 totaled $1.1 trillion with per person spending, on average, at just under $4,000.

"These new figures show we have been in a relatively tranquil period of health care spending," HHS Secretary Donna E. Shalala said. "However, we must continue to work to ensure that Americans maintain access to high-quality, affordable health care in the future. We've begun to see the benefits of the Balanced Budget Act in helping control health care costs and expect this trend to continue."

Longer-term estimates by HCFA, however, anticipate that health care spending will grow more rapidly in the coming years.

Today's report by HCFA analysts shows that the gap between health spending paid for by public and private sources inched closer in 1997, continuing a trend that began in 1990. Private funding paid for 53.6 percent of health care ($585.3 billion), down from 59.5 percent in 1990, while public programs, including Medicare and Medicaid, paid for 46.4 percent of health care in 1997, up from 40.5 percent in 1990.

The overall slowdown in health spending has been driven largely by rapidly falling growth in private spending, which reached an all-time low growth rate of 2.3 percent in 1994. In addition, since 1994, the rate of spending from public funding sources, primarily Medicare and Medicaid, has slowed, contributing to lower overall spending growth.

Total Medicaid spending increased only 3.8 percent in 1997, to $159.9 billion, the slowest growth since Medicaid's inception nearly 30 years ago. Preliminary data suggest the slowdown can be attributed to decreases in Medicaid enrollment in 1995, 1996 and 1997, as well as reductions in the rate of spending growth per enrollee.

In 1997, Medicare financed $214.6 billion in health care spending for its 38.4 million aged and disabled enrollees. However, annual Medicare spending growth slowed from 12.2 percent in 1994 to 7.2 percent in 1997. This reduction reflects, in part, a slowdown in medical price increases, the impact of legislation intended to reduce the growth in Medicare provider payments, changes in provider practices due to fraud and abuse activities, and a small-but-steady decline in the growth of the overall Medicare population.

In 1997, personal health care expenditures reached $969 billion, 89 percent of overall health spending. While spending on hospitals and physicians traditionally accounts for the majority of personal health care expenditures, the percentage being spent on these services has been declining and offset by increased spending for home health and other health care services. The largest increase has been in the costs of prescription drugs, which have risen at double-digit rates during the past few years.

Expenditures for hospital care accounted for 38 percent of personal health care spending and were the slowest growing service, increasing only 2.9 percent to $371 billion in 1997. Spending for physician services increased 4.4 percent in 1997, continuing a trend of single-digit growth started in 1992.

In 1997, expenditures for care provided by free-standing home health agencies reached $32.3 billion. Additional spending provided by hospital-based home health agencies are included with hospital expenditures. Growth in spending for free-standing home health care has slowed from 28.2 percent in 1990 to 3.7 percent in 1997 due in part to Medicare fraud and abuse detection activities.

Spending for prescription drugs -- $78.9 billion in 1997 -- has grown faster than spending for other types of health care goods and services, increasing 13.2 percent in 1996 and 14.1 percent in 1997. Among the most important reasons for this growth were increases in third party prescription payments, resulting in lower out-of-pocket spending on prescriptions. In addition, increased consumer demand induced by drug manufacturer advertising, an increase in the number of prescriptions filled and a larger number of new, higher priced drugs entering the marketplace contributed to this rate of growth.

Of the $585.3 billion spent by private sources for health care in 1997, about 60 percent -- $348 billion -- was paid by private health insurance premiums. The slowdown in premium growth in the 1990s can be attributed, in part, to the move from more expensive fee-for-service health plans into managed care. In 1997, 85 percent of the insured workforce was in some type of managed care plan.

Medicare spending grew 4 percentage points faster than private health insurance (7.2 percent compared with 3.2 percent) in 1997. When examined on a per enrollee basis, Medicare and private health insurance benefits (personal health care expenditures) have actually grown at comparable average annual rates from 1969 through 1997 (10.4 and 11.4 percent, respectively). The average growth in private health insurance per enrollee spending slowed over the period of 1994 to 1996, while growth in Medicare per enrollee spending continued historical trends, creating a gap that concerned policy makers. In 1997, Medicare per enrollee spending grew 5.8 percent, compared with 3.8 percent for private health insurance.

For the first time since the late 1980s, out-of-pocket spending (premiums, coinsurance and copayments) grew faster than private health insurance, reaching $187.6 billion (5.3 percent) in 1997. Some of the accelerated out-of-pocket growth during the last three years may be coming from managed care plans that recently required enrollees to pay more for plan benefits.

While trends in health care expenditures over the last few years have remained low, HCFA projected earlier this fall that growth in public health spending over the next 10 years will nearly double, reaching $2.1 trillion in 2007. A number of pressures will combine to increase future growth: Insurers experiencing growth in benefit payments higher than premiums earned and the demand by stockholders to correct eroding operating margins will cause premiums to increase. Providers may put added pressure on insurers to raise negotiated payments to offset slower public spending growth due to the Balanced Budget Act of 1997.

Additional pressures will come in the form of increased consumer demand. Recent strong economic growth has boosted employment and wages while prompting employers to offer health insurance to attract a qualified workforce. This is expected to temporarily lower the rate of uninsurance and increase demand for medical services. It will also raise average income, prompting increased demand for services. Demand will likely increase as new prescription drugs currently in the development pipeline reach the marketplace.

HHS press releases are available on the World Wide Web at: www.hhs.gov.