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Health Cost Growth Is Down, But Warning Signs Are Up

The rate of growth in national health spending was 4.4 percent in 2008, the lowest in nearly half a century. But, that recession-fueled slowdown is no indication of the future trajectory of health costs; in fact, because the national economy also slowed in 2008, the percentage of GDP that went to healthcare jumped to 16.2 percent from 15.9 percent in 2007. Moreover, the growth in health costs was nearly double the increase in nominal GDP (before factoring in inflation). And the 10.4 percent growth in federal health spending in 2008 is a troubling sign of things to come as the employer-based insurance system continues to unravel.

Overall, the U.S. spent about $2.34 trillion on healthcare in 2008, or $7,681 per capita. On a per-person basis, that is 3.5 percent more than in 2007, versus a 5 percent increase the year before. Personal health spending, a measure of how much was spent on healthcare services, excluding research and other kinds of healthcare investments, rose 4.6 percent. Of that amount, price increases accounted for 3.1 percentage points, and volume and intensity explained the rest.

The rates of growth in different healthcare sectors were all down from the previous year. For hospitals, the increase was 4.5 percent; for physicians and clinical services, 5 percent; for other professional services, 5.6 percent; for home health, 9 percent; for nursing homes, 4.6 percent; and for prescription drugs, 3.2 percent.

But Medicare reimbursement of hospitals increased 7.7 percent, partly offsetting lower prices and investment losses. Inpatient services billed to Medicare jumped 5.5 percent, compared to an increase of 0.6 percent the previous year, mainly because of growth in hospital admissions.

Why did hospital admissions rise? Were people sicker in 2008 than they were in 2007? One alternative explanation that springs to mind is that physicians admitted more Medicare patients as the number of privately insured patients they saw declined. The Medicare actuaries who prepared the national health spending report noted that about half of physicians in a recent survey said they had seen a drop in patient volume during the recession. "This suggests that growth in the intensity of physician services may have accelerated in 2008," the researchers wrote.

The drop in patient visits occurred as the unemployment rate rose and the number of people insured through their employers declined. At the same time, companies steadily increased the percentage of insurance premiums and other costs that their workers had to pay. As a result, private businesses' spending for health care increased just 1.2 percent in 2008-another harbinger of the future. Meanwhile, the federal government shouldered an increased share of Medicaid costs as state budgets buckled under a loss of tax revenue. The cost of Medicare Advantage plans also grew. Altogether, healthcare spending soared to 36 percent of the federal budget in 2008 from 28 percent a year earlier. A similar pattern has been observed in other recessions, but is more marked this time around.

So what does it all mean? In short, the government takeover of healthcare that so many people fear is well underway and will accelerate, whether or not the current reform legislation passes. When fewer consumers and businesses can afford to pay for healthcare, the only payer left is the taxpayer, augmented by Uncle Sam's ability to borrow against future revenues. It's a shell game that can't continue for too much longer.