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Health care spending held down by economy

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Government researchers and private experts say the weak economy, the rapid rise of generic drugs and lower-cost treatment alternatives are major reasons why total U.S. health care spending increased a modest 3.9% in 2010.

That 3.9% increase followed a 3.8% rise in 2009—the lowest increase in the 51 years the federal government has been collecting and analyzing such information. It contrasts sharply with explosive growth in health care expenditures just a few years ago.

From 2001 through 2003, increases in health care spending averaged nearly 9% a year. As recently as 2007, expenditures surged 6.2% (see chart).

Researchers at the Centers for Medicare and Medicaid Services, which prepared the report, and private experts say that the Great Recession clearly was a factor in the dramatic slowing of health care spending, which totaled $2.594 trillion in 2010.

The slower growth was influenced by consumers who remained “cautious about their spending—in part because of losses in private health insurance coverage, lower median household income and future financial uncertainty,” according to the CMS report.

Indeed, spending for certain health care services that often can be deferred remained nearly flat. For example, dental care expenditures rose a modest 2.2% in 2010.

“People are spending less money on elective services. There is downward pressure on utilization,” said Dan Levin, a principal with Buck Consultants L.L.C. in Chicago.

Aiding the recent moderation has been the slew of expensive, widely used prescription drugs that have lost their patent protection, allowing introduction of cheaper generics.

“This has been a record period for drugs going off-patent. There can be a dramatic decrease in the cost of a drug when it goes off-patent,” said Michael Thompson, a principal with PricewaterhouseCoopers L.L.P. in New York.

In fact, prescription drug expenditures inched up to $259.1 billion in 2010 from $256.1 billion in 2009, a 1.2% increase. By contrast, prescription drug expenditures rose by double digits annually from 2000 through 2003.

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With more brand-name drugs losing their patent protection, the percentage of prescriptions filled through cheaper generics has surged. Today, it isn't uncommon in a group plan for two-thirds of prescriptions to be filled with generics, a big change from 15 or so years ago when generics often accounted for just 45% of prescriptions, Mr. Levin said.

Experts also attribute the moderation of health care spending increases to sweeping changes—still ongoing—in the ways health care services are delivered. In particular, the growth of urgent care services has given consumers a lower-cost alternative to hospital emergency rooms for certain services.

“Care is being delivered in more cost-efficient settings,” said Jim Winkler, large employer market leader in the Norwalk, Conn., office of Aon Hewitt.

In addition, a growing number of medical procedures are being performed on an outpatient basis, further restraining cost increases, PwC's Mr. Thompson said.

Group health care plan redesign may—finally—also be a factor that is restraining costs.

During the past several years, a rapidly growing percentage of employers have embraced high-deductible health insurance plans. Last year, for example, nearly one-third of employers with at least 500 employees offered a consumer-driven health plan linked to a health savings account or health reimbursement arrangement, up from just 5% as recently as 2005, according to New York-based Mercer L.L.C.

Many other employers have simply boosted deductibles. For example, the median deductible for individual coverage now is $1,000 among preferred provider organizations that impose deductibles, according to Mercer.

Exposing employees to a bigger chunk of costs has, experts say, led many to become better health care consumers, making them more likely to look for lower-cost ways of receiving services.

“By definition, a $1,000 deductible is going to make you a better health care consumer,” said Tracy Watts, a Mercer partner in Washington. “They will look for the most cost-effective alternatives.”

Still, even as the growth of health care spending has eased, it continues to consume a record portion of the economy.

The nearly $2.6 trillion that was spent on health care in 2010 amounted to a record 17.9% of the gross domestic product, the same percentage as in 2009.

As recently as 2000, health care expenditures came to 13.8% of GDP, while in 1980 health care spending amounted to just 9.2% of GDP.