The Centers for Medicare & Medicaid Services (CMS) Office of the Actuary has just released the National Health Expenditure Accounts (NHEA) for 2008,1 and certain results were widely publicized. Health care spending growth in the United States slowed to 4.4% in 2008 — a 48-year low. And, nevertheless, the health care portion of gross domestic product (GDP) grew from 15.9% in 2007 to 16.2% in 2008 — a significant increase — as the country experienced slowing and ultimately negative economic growth.
This article, by contrast, focuses on less widely mentioned results in the accounts, particularly those pertaining to employer-sponsored health insurance plans, and comparative trends in health care prices and utilization.
Spending by private-sector employers on health insurance grew quite slowly in 2008, reflecting both declining enrollments and greater cost sharing with employees and retirees. (These trends, however, have not been seen as yet in the government sector’s health spending for its workers and retirees.) Overall, both price and especially nonprice factors2 in health care spending growth showed real restraint in 2008. The recession has clearly played a role here; there is some indication that longer-term structural changes might also be taking place.
Looking to the future, these underlying trends will continue to be felt and could even deepen. But the possible enactment and nature of federal health care reform legislation will likely have the strongest effect on both the short- and long-term growth rates in overall health care spending.
About the health expenditure accounts
The NHEA measure annual spending for health care goods and services in the United States, which totaled $2.3 trillion — $7,681 per person — in 2008. Spending consists mainly of personal health care, such as hospital care, professional services (physicians, dentists and others), home health and nursing home care, prescription drugs and personal medical equipment. It also includes administrative costs (for both public and private programs), public health initiatives, and investments in structures, equipment and noncommercial research.
The overall 4.4% increase in 2008 represents a steady deceleration in growth rates over the last few years, from 7.9% in 2005, 6.6% in 2006 and 6% in 2007. While almost all types of spending grew more slowly, the slowdown for prescription drugs was especially notable. Its growth rate declined from 4.5% in 2007 to 3.2% in 2008, as fewer new drugs entered the market and some were taken off the market or restricted. The growth rate of administrative costs for private health insurance fell dramatically — from 4.3% in 2007 to 0.7% in 2008.
Employer-sponsored health insurance plans
In addition to measuring health spending by service type, the NHEA track health care spending by the major paying sectors: private businesses, households, and federal, state and local governments. In 2008, health care spending growth slowed in all sectors except the federal government, which saw an increase as it picked up part of the states’ Medicaid bills and Medicare spending growth accelerated, especially for hospitals, physicians and prescription drugs.
Private employers
Private business accounts for slightly less than 25% of national spending on health services and supplies. The growth rate for private business spending fell from 3.9% in 2007 to only 1.2% in 2008. This is even lower than growth rates in the mid-1990s, a period marked by increased enrollment in more tightly managed health care plans. Private business spending on health care consists primarily of employer contributions to private health insurance (PHI) premiums but also includes employer Medicare hospital insurance payroll taxes, and premiums for temporary disability insurance and workers’ compensation.3
The low growth in private employer premiums may be attributed partly to lower enrollment (-1%), as the private-sector workforce shrank during the recession. But the explanation also lies in the steadily declining share of PHI premiums paid by private employers: from a recent high of 74.7% in 2000 — at the top of the economic boom and a tight labor market — to 71% in 2007 and to 69.8% in 2008.4
Some of this greater cost sharing might arise from the growing prevalence of high-deductible health plans and a shift from co-pay/no coinsurance plans to plans with deductibles and coinsurance.5 Continued cutbacks in private employer support for retiree health plans might be another factor.6
Another way of seeing the economy of private employer contributions to health spending is as a share of employee compensation. Figure 1 shows private-sector employer contributions to PHI, Medicare and various auxiliary health-related insurances as shares of employee compensation from 1987 through 2008.
Figure 1. Private employer spending on health care as a share of total worker compensation, 1987–2008
Source: Towers Watson, based on the NHEA.
Employer contributions to PHI premiums were 6.35% of employee compensation in 2005 but have declined since then, reaching 6.0% in 2008.
Government employers
By contrast, health care spending growth among government employers (federal, state and local) has remained much more stable. For example, state and local government employer contributions to PHI premiums increased by 5.3% in 2008 — a small decline from the 5.7% rate of increase in 2007. Of course, government-sector employment has withstood the recession better than employment in the private sector, but the generosity of government employers to their workers and retirees has held up as well. Since 2005, the federal government has contributed around 72% of PHI premium cost, and state and local governments paid 80.6%, only a slight decline from a 2004 high of 80.9%. Figure 2 shows this relatively stable level of generosity and the consequent rising burden on the government sector, again measured by employer contributions to PHI premiums and Medicare payroll taxes as a share of employee compensation.
Figure 2. Government employer spending on health care as a share of total worker compensation 1987–2008
Source: Towers Watson, based on the NHEA.
For government employers, PHI premium contributions reached a high of 9.33% of total worker compensation in 2006 and were still at 9.27% in 2008.
Trends in health care prices and utilization
In the NHEA, personal health care spending is a subset of national health spending that includes the purchase of health care goods and services, and comprises the vast majority of total spending. The NHEA divide growth in personal health spending into two broad factors: price and nonprice. Price is independently calculated from various producer and consumer price indexes for the major categories of health spending. Nonprice is the residual after subtracting the rate of change in price from the growth rate in total spending. It measures growth in health spending arising from changes in population, use, intensity of services, revenue from nonpatient and nonoperating sources, and other factors. In 2008, growth in personal health care spending was 4.6% — price growth accounted for 3.1 percentage points and nonprice for the remaining 1.5 percentage points.
Figure 3 shows the growth in personal health care expenditures and the two component factors of that growth since 1987. Some of the movements seem to relate to macroeconomic conditions. In particular, overall growth declines during and following a recession (July 1990 to March 1991, March to November 2001, and December 2007 to the present), as inflation ebbs and income-sensitive elements of demand fall.
Plan sponsor and government policies also strongly influence price and nonprice factors, as well as the overall growth rate. For example, in the mid-1990s, both overall and price growth slowed significantly in response to cuts in Medicare and the spread of managed care plans. In the early 2000s, all spending and the two factors rose after a backlash against these plans. More recently, the growing popularity of high-deductible health plans and lower state reimbursement rates for Medicaid providers have slowed nonprice factor growth, although the effect on price growth has been less pronounced.
Figure 3. Factors accounting for growth in personal health care expenditures, 1987–2008
Source: Exhibit 3 in Micah Hartman, et al., “Health Spending Growth at a Historic Low in 2008,” Health Affairs, January 2010, 29(1), pp. 147-55.
Over the years, the run-up in health prices in excess of general inflation and in nonprice factors in excess of population growth has prompted considerable — and warranted — concern about the sustainability of the U.S. health care system and whether the paying sectors, including private businesses, can continue to support such spending. Therefore, to gauge whether there is real and long-term slowing of health care spending, even beyond the effect of the business cycle, we subtract the rate of change in the GDP deflator and the population growth rate from the price and nonprice factors, respectively (Figures 4 and 5).
Figure 4. Increases in health care prices and GDP deflator, 1987–2008
Source: Towers Watson, based on the NHEA.
Figure 5. Growth in nonprice factors and population growth, 1987–2008
Source: Towers Watson, based on the NHEA.
The gap between health care price inflation and overall inflation has narrowed over time, particularly in 1997 and 2006. The gap between growth in nonprice factors and population growth, which essentially measures growth in health care use and intensity, has been much more volatile and diminished appreciably in 1994 and 2008. Clearly, both factors are slowing somewhat, perhaps owing to structural and policy changes rather than solely the weak economy. While these trends are hopeful, however, it is still too soon to consider them to be long-term, especially given past reversals.
Possible future developments
The likely biggest influence on future growth in health spending will be the fate and character of federal health care reform legislation.7 Expanded coverage could stimulate spending. Or, reforms could begin to address problems in the delivery systems and the underlying financial incentives that drive the behavior of health care providers and consumers.
Nonetheless, certain elements currently encourage economy in national health spending, at least in the short term. The ailing budgets of state and local governments suggest that spending for both Medicaid and health plans for government workers — heretofore largely untouched — will meet with strong downward pressure. Continued weak labor markets with high unemployment and low wage growth, as well as wider and deeper structural changes in health plans, suggest modest growth for private business spending on health. Some pressure for health care spending will leak to the household sector, but there, too, modest income growth and steadily increasing consumer price sensitivity ultimately will depress growth rates.
1 See Micah Hartman, Anne Martin, Olivia Nuccio, Aaron Catlin and others, “Health Spending Growth at a Historic Low in 2008,” Health Affairs, January 2010, 29(1), pp. 147-55, and CMS Office of the Actuary, “Sponsors of Health Care Costs: Business, Households, and Governments, 1987-2008.”
2 Nonprice growth measures spending arising from changes in population, use, intensity of services and other factors.
3Premiums for individual insurance are included in spending by households.
5 According to the National Business Group on Health and Towers Watson survey cited above, adoption of high-deductible health plans increased from 39% in 2007 to 47% in 2008, and median enrollment of employees increased from 10% to 12%.
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