The Increasing Cost of Health Care - Controlling Health Care Spending

In 1996 national health expenditures topped $1 trillion for the first time, and by 2002 national health expenditures exceeded $1.5 trillion. Despite the continuing growth in health care spending from year to year between 1998 and 2002—from 6.5% in 1998 to 9.3% in 2002—these figures represent a decline from the skyrocketing costs that marked the beginning of the 1990s. (See Table 5.5.) In 1990, for instance, health costs grew at a staggering 11.7% from the previous year.

In order to achieve these results, the nation's health care system underwent some dramatic changes. Beginning in the late 1980s, employers began looking for new ways to contain health benefit costs for their workers. Many enrolled their employees in managed care programs as alternatives to traditional, fee-for-service insurance. Managed care programs offered lower premiums by keeping a tighter control on costs and utilization, and by emphasizing the importance of preventive care. This allowed insurers to negotiate discounts with providers (physicians, hospitals, clinical laboratories, and others) in exchange for guaranteed access to employer-insured groups. Private insurance and other private sources such as privately funded construction and philanthropy pay for about 40% of the nation's health costs, according to 2002 data. Public sources pick up

TABLE 5.4

National health expenditures, by source of funds, selected years 1980–2002
Item	1980	1988	1990	1993	1994	1995	1996	1997	1998	1999	2000	2001	2002
1July 1 census resident based population estimates for each year 1980–2002.
2U.S. Department of Commerce, Bureau of Economic Analysis.
3Average annual growth between 1960 and 1980.
Note: Numbers and percents may not add to totals because of rounding.
SOURCE: "Table 1. National Health Expenditures Aggregate and Per Capita Amounts, Percent Distribution and Average Annual Percent Change by Source of Funds: Selected Calendar Years 1980–2002," Centers for Medicare and Medicaid Services, 2002, http://www.cms.hhs.gov/statistics/nhe/projections-2003/t2.asp (accessed July 6, 2004)
	Amount in billions
National health expenditures	$245.8	$558.1	$696.0	$888.1	$937.1	$990.2	$1,039.3	$1,092.8	$1,150.3	$1,222.6	$1,309.4	$1,420.7	$1,553.0
Private	140.9	331.7	413.5	497.7	509.7	533.6	556.8	589.2	629.0	669.7	714.9	768.4	839.6
Public	104.8	226.4	282.5	390.4	427.4	456.6	482.5	503.6	521.3	552.9	594.6	652.3	713.4
Federal	71.3	154.1	192.7	274.4	298.9	322.4	344.8	360.2	368.4	386.4	416.0	460.3	504.7
State and local	33.5	72.3	89.8	116.0	128.5	134.2	137.7	143.4	152.9	166.4	178.6	192.0	208.7
	Number in millions
U.S. population1	230	249	254	263	265	268	270	273	275	278	280	283	285
	Amount in billions
Gross domestic product2	$2,796	$5,108	$5,803	$6,642	$7,054	$7,401	$7,813	$8,318	$8,782	$9,274	$9,825	$10,082	$10,446
	Per capita amount
National health expenditures	$1,067	$2,243	$2,738	$3,381	$3,534	$3,698	$3,847	$4,007	$4,179	$4,402	$4,670	$5,021	$5,440
Private	612	1,333	1,627	1,895	1,922	1,993	2,061	2,161	2,285	2,411	2,550	2,716	2,941
Public	455	910	1,111	1,486	1,612	1,705	1,786	1,846	1,894	1,991	2,121	2,306	2,499
Federal	310	619	758	1,045	1,127	1,204	1,276	1,321	1,339	1,391	1,483	1,627	1,768
State and local	146	290	353	442	485	501	510	526	556	599	637	679	731
	Percent distribution
National health expenditures	100.0	100.0	100.0	100.0	100.0	100.0	100.0	100.0	100.0	100.0	100.0	100.0	100.0
Private	57.3	59.4	59.4	56.0	54.4	53.9	53.6	53.9	54.7	54.8	54.6	54.1	54.1
Public	42.7	40.6	40.6	44.0	45.6	46.1	46.4	46.1	45.3	45.2	45.4	45.9	45.9
Federal	29.0	27.6	27.7	30.9	31.9	32.6	33.2	33.0	32.0	31.6	31.8	32.4	32.5
State and local	13.6	13.0	12.9	13.1	13.7	13.6	13.2	13.1	13.3	13.6	13.6	13.5	13.4
	Percent of gross domestic product
National health expenditures	8.8	10.9	12.0	13.4	13.3	13.4	13.3	13.1	13.1	13.2	13.3	14.1	14.9
	Average annual percent growth from previous year shown
National health expenditures	11.73	10.8	11.7	8.5	5.5	5.7	5.0	5.1	5.3	6.3	7.1	8.5	9.3
Private	10.23	11.3	11.7	6.4	2.4	4.7	4.4	5.8	6.7	6.5	6.7	7.5	9.3
Public	14.83	10.1	11.7	11.4	9.5	6.8	5.7	4.4	3.5	6.0	7.5	9.7	9.4
Federal	17.53	10.1	11.8	12.5	9.0	7.8	7.0	4.4	2.3	4.9	7.6	10.7	9.7
State and local	11.53	10.1	11.4	8.9	10.8	4.4	2.6	4.2	6.6	8.8	7.3	7.5	8.7
U.S. population	1.13	1.0	1.1	1.1	1.0	1.0	0.9	0.9	0.9	0.9	1.0	0.9	0.9
Gross domestic product	8.73	7.8	6.6	4.6	6.2	4.9	5.6	6.5	5.6	5.6	5.9	2.6	3.6

about 45% of the nation's costs, and 14% of the costs come directly from consumers' pockets. (See Figure 5.1.)

There is heightened interest in developing treatments and technologies designed to reduce the health system's dependence on expensive, inpatient hospital care. After professional services ($501.5 billion), hospital care expenditures were the single-largest spending component of total health care expenses ($486.5), accounting for 31% of all national health care expenditures. (See Table 5.8 and Figure 5.2.) The annual hospital cost growth rate dropped from 12.8% per year in 1980 to around 3.4% between 1995 and 1998. In 2000, however, it spiked to 5%, and by 2002 it had nearly doubled to 9.5%. (See Table 5.8.)

Furthermore, higher hospital prices in 2002 resulted in the greatest increase in health care spending in a decade. Total health care costs increased 9.3% in 2002, compared with a 7.1% increase in 2000, and hospital care was responsible for nearly half of the increase. Economic analysis of the increase attributable to hospitals revealed that less than 40% was caused by rising hospital prices and slightly more than 60% by increased utilization of hospital services.

Physician and clinical services accounted for 22% ($339.5 billion) of 2002 national health spending. (See Table 5.8 and Figure 5.2.) The average annual physician spending, however, dropped steadily from 13.2% in 1988 to 4% in 1996. From 1997 to 2000 it fluctuated between 5 and 7.2% and while it spiked to 8.6% in 2001, it dropped to 7.7% in 2002. (See Table 5.8.) Managed care has played a large role in the slowed growth observed in this sector of health care delivery.

In 2002 spending for nursing home care totaled $103.2 billion, and spending for home health care reached $36.1 billion. (See Table 5.8.) Although in 2002 nursing home expenses increased just over 4%, this increase followed four consecutive years of decelerating growth from a high

TABLE 5.5

National health expenditures by type of expenditure, selected years 1990–2013
							Projected
Type of expenditure	1990	1998	1999	2000	2001	2002	2003	2004	2005	2006	2007	2008	2009	2010	2011	2012	2013
	Amount in billions
National health expenditures	$696.00	$1,150.30	$1,222.60	$1,309.40	$1,420.70	$1,553.00	$1,673.60	$1,793.60	$1,920.80	$2,064.00	$2,219.20	$2,387.70	$2,565.00	$2,751.00	$2,945.60	$3,145.80	$3,358.10
Health services and supplies	669.6	1,112.10	1,181.70	1,261.40	1,370.00	1,496.30	1,613.60	1,730.10	1,853.00	1,991.00	2,140.50	2,303.30	2,474.80	2,654.70	2,843.00	3,036.50	3,241.90
Personal health care	609.4	1,009.60	1,065.00	1,135.30	1,231.40	1,340.20	1,436.50	1,540.70	1,651.50	1,775.30	1,907.40	2,050.10	2,201.30	2,360.70	2,527.00	2,699.10	2,881.20
Hospital care	253.9	378.5	393.5	413.2	444.3	486.5	518.1	551.7	585.8	623.2	661.8	702.6	746.1	791.5	838.1	885.2	934.3
Professional services	216.9	375.7	397.6	426.5	464.3	501.5	535.8	572	611.2	656.2	705	759.2	816.2	876.7	940.3	1,006.00	1,075.80
Physician and clinical services	157.5	256.8	270.9	290.3	315.1	339.5	362.8	386.8	412	441.2	472.4	507.1	542.8	580.3	619.4	659.2	700.9
Other professional services	18.2	35.5	36.7	38.8	42.6	45.9	48.3	51	54.2	57.8	61.8	66.2	71	76.3	81.6	87	92.8
Dental services	31.5	53.2	56.4	60.7	65.6	70.3	74	78	82.3	87.1	92.2	97.6	103.1	108.8	114.6	120.2	126.3
Other personal health care	9.6	30.2	33.7	36.7	40.9	45.8	50.8	56.2	62.6	70.1	78.7	88.4	99.2	111.3	124.8	139.6	155.9
Nursing home and home health	65.3	122.7	121.9	125.5	132.8	139.3	145.2	152.2	160.2	169.5	179.6	190.5	202.5	215.3	228.8	243	258.2
Home health care	12.6	33.6	32.3	31.7	33.7	36.1	38.3	40.6	43.2	46.2	49.4	52.7	56.3	60.3	64.4	68.7	73.4
Nursing home care	52.7	89.1	89.6	93.8	99.1	103.2	107	111.7	116.9	123.3	130.2	137.8	146.1	155	164.4	174.3	184.8
Retail outlet sales of medical products	73.3	132.7	152	170.1	190	212.9	237.4	264.8	294.4	326.4	360.9	397.7	436.5	477.2	519.8	564.9	612.9
Prescription drugs	40.3	87.3	104.4	121.5	140.8	162.4	184.1	207.9	233.6	261.8	292.4	325.3	360.1	396.7	435.2	476.2	519.8
Other medical products	33.1	45.4	47.6	48.5	49.2	50.5	53.2	56.9	60.8	64.7	68.5	72.4	76.4	80.5	84.6	88.7	93.1
Durable medical equipment	10.6	16.9	17.2	17.7	18.2	18.8	19.6	20.6	21.5	22.6	23.8	25	26.4	27.8	29.3	30.9	32.6
Other non-durable medical products	22.5	28.6	30.3	30.8	31	31.7	33.6	36.4	39.3	42.1	44.7	47.4	50	52.7	55.3	57.8	60.5
Government administration and net cost of private health insurance	40	64.5	73	80.3	90.3	105	120.8	127.9	134.7	143.1	154.3	167.7	180.8	193.5	207.2	219.8	233.7
Government administration public health activities	20.2	38	43.7	45.8	48.3	51.2	56.3	61.4	66.8	72.6	78.8	85.5	92.7	100.5	108.8	117.6	127.1

Investment	26.4	38.3	40.9	48	50.6	56.7	60	63.5	67.8	72.9	78.7	84.5	90.3	96.3	102.6	109.2	116.1
Research2	12.7	20.5	23.4	28.8	31.5	34.3	36.3	38.6	41.5	45	48.8	52.7	56.8	61.2	65.7	70.4	75.4
Construction	13.7	17.7	17.6	19.2	19.2	22.4	23.7	25	26.3	27.9	29.9	31.7	33.4	35.1	36.9	38.8	40.8
Average annual percent change from previous year shown
National health enditures	—	6.5	6.3	7.1	8.5	9.3	7.8	7.2	7.1	7.5	7.5	7.6	7.4	7.3	7.1	6.8	6.7
Health services and supplies	—	6.5	6.3	6.8	8.6	9.2	7.8	7.2	7.1	7.4	7.5	7.6	7.4	7.3	7.1	6.8	6.8
Personal health care	—	6.5	5.5	6.6	8.5	8.8	7.2	7.3	7.2	7.5	7.4	7.5	7.4	7.2	7	6.8	6.7
Hospital care	—	5.1	3.9	5	7.5	9.5	6.5	6.5	6.2	6.4	6.2	6.2	6.2	6.1	5.9	5.6	5.6
Professional services	—	7.1	5.8	7.3	8.8	8	6.8	6.8	6.8	7.4	7.4	7.7	7.5	7.4	7.3	7	6.9
Physician and clinical services	—	6.3	5.5	7.2	8.6	7.7	6.8	6.6	6.5	7.1	7.1	7.4	7	6.9	6.7	6.4	6.3
Other professional services	—	8.7	3.3	5.8	9.9	7.6	5.2	5.7	6.2	6.7	6.9	7.2	7.3	7.3	7	6.6	6.6
Dental services	—	6.8	6.1	7.7	8	7.2	5.2	5.4	5.6	5.8	5.9	5.8	5.7	5.5	5.3	55	5
Other personal health care	—	15.3	11.7	9	11.3	12.1	10.8	10.7	11.4	11.9	12.2	12.3	12.3	12.2	12.1	11.9	11.6
Nursing home and home health	—	8.2	−0.6	3	5.8	4.9	4.3	4.8	5.2	5.8	6	6.1	6.3	6.3	6.3	6.2	6.2
Home health care	—	13.1	−3.7	−1.8	6.2	7.2	5.9	6.1	6.6	6.8	6.9	6.8	6.8	7	6.8	6.8	6.8
Nursing home care	—	6.8	0.5	4.7	5.7	4.1	3.7	4.4	4.7	5.4	5.6	5.8	6.1	6.1	6.1	66	6
Retail outlet sales of medical products	—	7.7	14.5	11.9	11.7	12	11.5	11.6	11.2	10.9	10.5	10.2	9.7	9.3	8.9	8.7	8.5
Prescription drugs	—	10.1	19.7	16.4	15.9	15.3	13.4	12.9	12.4	12.1	11.7	11.3	10.7	10.2	9.7	9.4	9.2
Other medical products	—	4.1	4.7	2.1	1.3	2.6	5.5	6.9	6.8	6.4	5.9	5.7	5.5	5.3	5.1	4.8	4.9
Durable medical equipment	—	6	2.3	3	2.3	3.3	4.6	4.9	4.7	5	5.2	5.3	5.4	5.4	5.4	5.4	5.5
Other non-durable medical products	—	3.1	6.1	1.5	0.8	2.3	6	8.1	8	7.1	6.4	5.9	5.6	5.3	5	4.6	4.6

1The health spending projections were based on the 2002 version of the National Health Expenditures (NHE) released in January 2004.
2Research and development expenditures of drug companies and other manufacturers and providers of medical equipment and supplies are excluded from research expenditures. These research expenditures are implicitly included in the expenditure class in which the product falls, in that they are covered by the payment received for that product.
Note: Numbers may not add to totals because of rounding.
SOURCE: "Table 2. National Health Expenditure Amounts and Average Annual Percent Change by Type of Expenditure: Selected Calendar Years 1990–2013," Centers for Medicare and Medicaid Services, 2002, http://www.cms.hhs.gov/statistics/nhe/projections-2003/t2.asp (accessed July 2, 2004)
Government administration and net cost of private health insurance	—	6.1	13.2	10	12.5	16.2	15.1	5.9	5.3	6.2	7.9	8.7	7.8	7	7.1	6.1	6.3
Government public health activities	—	8.2	15.1	4.8	5.5	5.9	10	9.2	8.8	8.7	8.5	8.5	8.5	8.4	8.2	8.1	8
Investment	—	4.8	7	17.3	5.5	11.9	5.9	5.9	6.7	7.5	7.9	7.4	6.9	6.7	6.5	6.4	6.3
Research2	—	6.2	13.8	23.1	9.4	8.9	5.9	6.1	7.7	8.3	8.4	8.1	7.8	7.6	7.4	7.2	7
Construction	—	3.2	−0.9	9.5	−0.3	16.8	5.8	5.6	5.2	6.3	6.9	6.2	5.4	5.1	5.1	5.1	5.1

TABLE 5.6

National health expenditures, by source of funds and type of expenditure, 2001 and 2002
(In billions)
		Private
			Consumer				Public
Year and type of expenditure	Total	All private funds	Total	Out-of-pocket payments	Private health insurance	Other	Total	Federal	State and local
Note: Research and development expenditures of drug companies and other manufacturers and providers of medical equipment and supplies are excluded from research expenditures. These research expenditures are implicitly included in the expenditure class in which the product falls, in that they are covered by the payment received for that product. Numbers may not add to totals because of rounding.
SOURCE: Adapted from "Table 3. National Health Expenditures, by Source of Funds and Type of Expenditure: Selected Calendar Years 1997–2002," Centers for Medicare and Medicaid Services, 2002, http://www.cms.hhs.gov/statistics/nhe/projections-2003/t2.asp (accessed July 6, 2004)
2001
National health expenditures	1,420.7	768.4	696.1	200.5	495.6	72.3	652.3	460.3	192.0
Health services and supplies	1,370.0	751.0	696.1	200.5	495.6	54.9	619.0	434.6	184.4
Personal health care	1,231.4	691.4	637.8	200.5	437.2	53.7	540.0	412.1	127.8
Hospital care	444.3	181.7	162.6	13.1	149.5	19.1	262.6	211.6	51.1
Professional services	464.3	306.6	276.8	73.9	202.9	29.7	157.7	118.6	39.1
Physician and clinical services	315.1	208.7	186.5	33.1	153.4	22.2	106.4	88.1	18.3
Other professional services	42.6	31.7	28.8	12.4	16.4	2.9	10.9	7.0	3.9
Dental services	65.6	61.7	61.6	28.4	33.2	0.1	3.9	2.3	1.6
Other personal health care	40.9	4.4	—	—	—	4.4	36.4	21.1	15.3
Nursing home and home health	132.8	52.2	47.3	32.8	14.5	4.8	80.7	56.6	24.1
Home health care	33.7	14.1	13.0	6.1	6.9	1.1	19.6	14.4	5.2
Nursing home care	99.1	38.0	34.3	26.7	7.6	3.7	61.1	42.2	18.9
Retail outlet sales of medical products	190.0	151.0	151.0	80.7	70.3	—	39.0	25.4	13.6
Prescription drugs	140.8	109.3	109.3	42.5	66.8	—	31.5	18.0	13.5
Other medical products	49.2	41.7	41.7	38.2	3.5	—	7.5	7.3	0.2
Durable medical equipment	18.2	12.1	12.1	8.7	3.5	—	6.0	5.8	0.2
Other non-durable medical products	31.0	29.6	29.6	29.6	—	—	1.5	1.5	—
Government administration and net cost of private health insurance	90.3	59.6	58.3	—	58.3	1.3	30.7	17.2	13.6
Government public health activities	48.3	—	—	—	—	—	48.3	5.3	43.0
Investment	50.6	17.4	—	—	—	17.4	33.3	25.7	7.6
Research	31.5	2.7	—	—	—	2.7	28.8	25.0	3.8
Construction	19.2	14.7	—	—	—	14.7	4.5	0.7	3.8
2002
National health expenditures	1,553.0	839.6	762.1	212.5	549.6	77.5	713.4	504.7	208.7
Health services and supplies	1,496.3	819.7	762.1	212.5	549.6	57.7	676.6	476.5	200.1
Personal health care	1,340.2	748.1	691.8	212.5	479.3	56.2	592.2	450.5	141.7
Hospital care	486.5	200.1	179.8	14.7	165.0	20.3	286.4	229.9	56.5
Professional services	501.5	328.4	297.0	78.2	218.9	31.3	173.2	129.7	43.4
Physician and clinical services	339.5	224.7	201.1	34.3	166.9	23.6	114.8	94.7	20.1
Other professional services	45.9	33.2	30.2	13.0	17.2	3.0	12.6	8.2	4.4
Dental services	70.3	65.8	65.7	30.9	34.8	0.1	4.5	2.7	1.8
Other personal health care	45.8	4.7	—	—	—	4.7	41.2	24.1	17.1
Nursing home and home health	139.3	51.4	46.8	32.4	14.4	4.6	87.9	61.7	26.2
Home health care	36.1	14.3	13.2	6.5	6.7	1.1	21.9	16.2	5.7
Nursing home care	103.2	37.1	33.6	25.9	7.7	3.5	66.1	45.5	20.5
Retail outlet sales of medical products	212.9	168.2	168.2	87.2	81.0	—	44.7	29.1	15.6
Prescription drugs	162.4	126.2	126.2	48.6	77.6	—	36.2	20.9	15.4
Other medical products	50.5	42.1	42.1	38.6	3.5	—	8.4	8.2	0.2
Durable medical equipment	18.8	11.9	11.9	8.5	3.5	—	6.8	6.6	0.2
Other non-durable medical products	31.7	30.1	30.1	30.1	—	—	1.6	1.6	—
Government administration and net cost of private health insurance	105.0	71.7	70.2	—	70.2	1.4	33.3	19.0	14.3
Government public health activities	51.2	—	—	—	—	—	51.2	7.0	44.1
Investment	56.7	19.8	—	—	—	19.8	36.8	28.3	8.6
Research	34.3	2.7	—	—	—	2.7	31.6	27.4	4.2
Construction	22.4	17.1	—	—	—	17.1	5.2	0.8	4.4

of 9.1% annual growth in 1995. The increase was caused by legislation that increased Medicare payments to nursing homes for selected complex medical conditions and for facilities specializing in the care of patients with AIDS.

Home health care expenses also slowed, from 20.3% annual growth in 1993 to 2.8% in 1997. In 1998, 1999, and 2000 the annual growth was actually negative but rose 6.2% in 2001 and 7.2% in 2002. (See Table 5.8.) Like nursing home expenditures, home health spending increased in 2000 after several years of decelerating growth.

However, the fastest-growing component of health care was the market for prescription drugs. In 2002 Americans

TABLE 5.7

Personal health care expenditures, by source of funds, selected years 1980–2002
			Third-party payments
						Public
Year	Total	Out-of-pocket payments	Total	Private health insurance	Other private funds	Total	Federal1	State and local1	Medicare2	Medicaid3
1Includes Medicaid SCHIP (State Children's Health Insurance Program) Expansion & SCHIP.
2Subset of federal funds.
3Subset of federal and state and local funds.
4Calculation of per capita estimates is inappropriate.
Note: Per capita amounts based on July 1 census resident based population estimates for each year 1980–2002. Numbers and percents may not add to totals because of rounding.
SOURCE: "Table 4. Personal Health Care Expenditures Aggregate and Per Capita Amounts and Percent Distribution by Source of Funds: Selected Calendar Years 1980–2002," Centers for Medicare and Medicaid Services, 2002, http://www.cms.hhs.gov/statistics/nhe/projections—2003/t2.asp (accessed July 6, 2004)
	Amount in billions
1980	$214.6	$58.2	$156.4	$60.6	$9.2	$86.6	$62.8	$23.8	$36.3	$24.7
1988	493.3	118.9	374.4	157.0	27.6	189.8	138.4	51.4	86.4	52.2
1993	775.8	146.9	628.8	259.9	38.4	330.5	250.6	79.9	144.4	115.7
1995	865.7	146.5	719.2	288.8	44.2	386.2	295.4	90.8	178.6	135.3
1996	911.1	151.9	759.3	302.2	47.3	409.8	316.5	93.3	193.1	144.5
1997	959.2	162.1	797.2	319.2	51.4	426.6	329.8	96.8	203.6	151.7
1998	1,009.6	175.3	834.3	342.0	54.4	437.9	334.7	103.2	204.0	160.0
1999	1,065.0	184.5	880.5	366.4	56.2	457.9	347.7	110.2	206.2	173.7
2000	1,135.3	192.6	942.8	398.7	54.2	489.8	372.0	117.8	217.5	188.3
2001	1,231.4	200.5	1,030.9	437.2	53.7	540.0	412.1	127.8	239.2	207.5
2002	1,340.2	212.5	1,127.7	479.3	56.2	592.2	450.5	141.7	259.1	232.4
	Per capita amount
1980	$931.4	$252.8	$678.6	$263.1	$39.7	$375.7	$272.4	$103.3	4	4
1988	1,982.3	477.9	1,504.3	630.9	110.8	762.6	555.9	206.6	4	4
1993	2,953.6	559.5	2,394.1	989.4	146.4	1,258.3	954.0	304.3	4	4
1995	3,232.8	547.0	2,685.8	1,078.4	165.2	1,442.2	1,103.0	339.1	4	4
1996	3,372.6	562.2	2,810.4	1,118.6	174.9	1,516.9	1,171.4	345.5	4	4
1997	3,517.3	594.3	2,923.0	1,170.5	188.4	1,564.1	1,209.1	355.0	4	4
1998	3,668.1	636.9	3,031.1	1,242.7	197.5	1,590.9	1,216.0	375.0	4	4
1999	3,834.6	664.2	3,170.3	1,319.4	202.3	1,648.6	1,251.8	396.8	4	4
2000	4,049.1	686.8	3,362.3	1,422.1	193.4	1,746.8	1,326.7	420.1	4	4
2001	4,352.2	708.7	3,643.5	1,545.4	189.7	1,908.4	1,456.6	451.8	4	4
2002	4,694.6	744.4	3,950.2	1,679.0	196.9	2,074.3	1,577.9	496.4	4	4
	Percent distribution
1980	100.0	27.1	72.9	28.3	4.3	40.3	29.3	11.1	16.9	11.5
1988	100.0	24.1	75.9	31.8	5.6	38.5	28.0	10.4	17.5	10.6
1993	100.0	18.9	81.1	33.5	5.0	42.6	32.3	10.3	18.6	14.9
1995	100.0	16.9	83.1	33.4	5.1	44.6	34.1	10.5	20.6	15.6
1996	100.0	16.7	83.3	33.2	5.2	45.0	34.7	10.2	21.2	15.9
1997	100.0	16.9	83.1	33.3	5.4	44.5	34.4	10.1	21.2	15.8
1998	100.0	17.4	82.6	33.9	5.4	43.4	33.2	10.2	20.2	15.8
1999	100.0	17.3	82.7	34.4	5.3	43.0	32.6	10.3	19.4	16.3
2000	100.0	17.0	83.0	35.1	4.8	43.1	32.8	10.4	19.2	16.6
2001	100.0	16.3	83.7	35.5	4.4	43.8	33.5	10.4	19.4	16.9
2002	100.0	15.9	84.1	35.8	4.2	44.2	33.6	10.6	19.3	17.3

spent $162.4 billion on prescription medication—a 15.3% increase from the previous year. (See Table 5.8.) A large part of the increase was financed by private insurers, which paid 48% of drug costs in 2002, up from 37.2% in 1995. (See Table 5.6.) Growth in this sector of health services has been fueled by the fact that prescription drugs are increasingly more often substituted for other types of health care. For example, antidepressant drugs have demonstrated effectiveness in place of more expensive psychotherapy.

Prescription Drug Prices Rose in 2004

A survey conducted by David Gross, Susan Raetzman, and Professor Stephen Schondelmeyer for the AARP (formerly known as the American Association of Retired Persons; AARP is a nonprofit, nonpartisan membership organization dedicated to making life better for persons aged fifty and older) found that pharmaceutical companies increased the prices they charge drug wholesalers for the top two hundred brand-name drugs an average of 3.4% in the first three months of 2004, while inflation in general was 1.2%. The study Trends in Manufacturer Prices of Prescription Drugs Used by Older Americans released in June 2004 by the AARP Public Policy Institute found that 29% of the drugs studied had increases in the first quarter (from December 31, 2003, to March 31, 2004) of more than 5%, or more than four times the rate of inflation for the same period. First-quarter increases of more than 7.5% were found in almost 11% of the drugs. Of the twenty-five brand-name drugs with the greatest sales in 2003, nearly two-thirds had price increases in the first quarter of 2004.

TABLE 5.8

National health expenditures by type of expenditure, selected years 1980–2002
Type of expenditure	1980	1988	1990	1993	1994	1995	1996	1997	1998	1999	2000	2001	2002
1Research and development expenditures of drug companies and other manufacturers and providers of medical equipment and supplies are excluded from research expenditures. These research expenditures are implicitly included in the expenditure class in which the product falls, in that they are covered by the payment received for that product.
2Average annual growth between 1960 and 1980.
Note: Numbers may not add to totals because of rounding.
SOURCE: "Table 2. National Health Expenditures Aggregate Amounts and Average Annual Percent Change by Type of Expenditure: Selected Calendar Years 1980–2002," Centers for Medicare and Medicaid Services, 2002, http://www.cms.hhs.gov/statistics/nhe/projections–2003/t2.asp (accessed July 6, 2004)
	Amount in billions
National health expenditures	$245.8	$558.1	$696.0	$888.1	$937.1	$990.2	$1,039.3	$1,092.8	$1,150.3	$1,222.6	$1,309.4	$1,420.7	$1,553.0
Health services and supplies	233.5	535.4	669.6	856.3	904.7	957.6	1,005.1	1,055.5	1,112.1	1,181.7	1,261.4	1,370.0	1,496.3
Personal health care	214.6	493.3	609.4	775.8	816.5	865.7	911.1	959.2	1,009.6	1,065.0	1,135.3	1,231.4	1,340.2
Hospital care	101.5	209.4	253.9	320.0	332.4	343.6	355.2	367.6	378.5	393.5	413.2	444.3	486.5
Professional services	67.3	176.3	216.9	280.7	297.5	316.5	332.9	352.2	375.7	397.6	426.5	464.3	501.5
Physician and clinical services	47.1	127.4	157.5	201.2	210.5	220.5	229.4	241.0	256.8	270.9	290.3	315.1	339.5
Other professional services	3.6	14.3	18.2	24.5	25.7	28.6	30.9	33.4	35.5	36.7	38.8	42.6	45.9
Dental services	13.3	27.3	31.5	38.9	41.4	44.5	46.8	50.2	53.2	56.4	60.7	65.6	70.3
Other personal health care	3.3	7.3	9.6	16.1	19.9	22.9	25.8	27.7	30.2	33.7	36.7	40.9	45.8
Nursing home and home health	20.1	48.9	65.3	87.6	94.4	105.1	113.5	119.6	122.7	121.9	125.5	132.8	139.3
Home health care	2.4	8.4	12.6	21.9	26.1	30.5	33.6	34.5	33.6	32.3	31.7	33.7	36.1
Nursing home care	17.7	40.5	52.7	65.7	68.3	74.6	79.9	85.1	89.1	89.6	93.8	99.1	103.2
Retail outlet sales of medical products	25.7	58.7	73.3	87.5	92.2	100.5	109.5	119.8	132.7	152.0	170.1	190.0	212.9
Prescription drugs	12.0	30.6	40.3	51.3	54.6	60.8	67.2	75.7	87.3	104.4	121.5	140.8	162.4
Other medical products	13.7	28.1	33.1	36.2	37.6	39.7	42.4	44.0	45.4	47.6	48.5	49.2	50.5
Durable medical equipment	3.9	8.7	10.6	12.8	13.3	14.2	15.3	16.2	16.9	17.2	17.7	18.2	18.8
Other non–durable medical products	9.8	19.4	22.5	23.4	24.3	25.6	27.1	27.9	28.6	30.3	30.8	31.0	31.7
Government administration and net cost of private health insurance	12.1	26.6	40.0	53.3	58.2	60.5	61.0	60.9	64.5	73.0	80.3	90.3	105.0
Government public health activities	6.7	15.5	20.2	27.2	30.0	31.4	32.9	35.4	38.0	43.7	45.8	48.3	51.2
Investment	12.3	22.7	26.4	31.8	32.5	32.6	34.2	37.2	38.3	40.9	48.0	50.6	56.7
Research1	5.5	10.8	12.7	15.6	16.3	17.1	17.8	18.7	20.5	23.4	28.8	31.5	34.3
Construction	6.8	11.9	13.7	16.2	16.2	15.5	16.4	18.5	17.7	17.6	19.2	19.2	22.4
	Average annual percent change from previous year shown
National health expenditures	11.72	10.8	11.7	8.5	5.5	5.7	5.0	5.1	5.3	6.3	7.1	8.5	9.3
Health services and supplies	11.82	10.9	11.8	8.5	5.7	5.9	5.0	5.0	5.4	6.3	6.8	8.6	9.2
Personal health care	11.72	11.0	11.1	8.4	5.2	6.0	5.2	5.3	5.3	5.5	6.6	8.5	8.8
Hospital care	12.82	9.5	10.1	8.0	3.9	3.4	3.4	3.5	3.0	3.9	5.0	7.5	9.5
Professional services	11.02	12.8	10.9	9.0	6.0	6.4	5.2	5.8	6.7	5.8	7.3	8.8	8.0
Physician and clinical services	11.52	13.2	11.2	8.5	4.6	4.8	4.0	5.0	6.6	5.5	7.2	8.6	7.7
Other professional services	11.72	18.8	12.7	10.4	4.9	11.2	8.1	8.1	6.3	3.3	5.8	9.9	7.6
Dental services	10.02	9.4	7.4	7.3	6.6	7.4	5.2	7.2	6.0	6.1	7.7	8.0	7.2
Other personal health care	8.62	10.5	15.0	18.7	23.3	15.3	12.6	7.4	8.9	11.7	9.0	11.3	12.1
Nursing home and home health	16.82	11.8	15.5	10.3	7.8	11.3	8.0	5.4	2.6	–0.6	3.0	5.8	4.9
Home health care	20.62	17.1	22.1	20.3	19.1	17.1	10.1	2.8	–2.8	–3.7	–1.8	6.2	7.2
Nursing home care	16.42	10.9	14.1	7.6	4.0	9.1	7.2	6.4	4.7	0.5	4.7	5.7	4.1
Retail outlet sales of medical products	8.62	10.9	11.8	6.0	5.4	9.0	9.0	9.4	10.8	14.5	11.9	11.7	12.0
Prescription drugs	7.82	12.4	14.7	8.4	6.6	11.2	10.5	12.8	15.2	19.7	16.4	15.9	15.3
Other medical products	9.42	9.4	8.5	3.1	3.7	5.8	6.6	3.9	3.2	4.7	2.1	1.3	2.6
Durable medical equipment	9.32	10.7	10.4	6.5	4.1	6.5	7.8	5.7	4.3	2.3	3.0	2.3	3.3
Other non–durable medical products	9.42	8.9	7.7	1.4	3.6	5.4	6.0	2.9	2.6	6.1	1.5	0.8	2.3
Government administration and net cost of private health insurance	12.22	10.3	22.7	10.0	9.2	4.0	0.9	–0.3	5.9	13.2	10.0	12.5	16.2
Government public health activities	15.32	11.0	14.2	10.4	10.3	4.7	4.7	7.7	7.2	15.1	4.8	5.5	5.9
Investment	10.42	8.0	7.8	6.4	2.1	0.3	5.1	8.8	2.7	7.0	17.3	5.5	11.9
Research1	10.92	8.9	8.2	7.2	4.3	5.2	4.3	5.0	9.7	13.8	23.1	9.4	8.9
Construction	10.02	7.2	7.4	5.7	0.1	–4.5	5.9	13.0	–4.4	–0.9	9.5	–0.3	16.8

Ironically, this increase occurred just after enactment of a new Medicare law intended to increase government spending for prescription drugs that promised prescription drug savings for older Americans and persons with disabilities. The price increase also preceded the June 2004 implementation of a pharmacy discount card program aimed at providing Medicare recipients savings on brand-name drugs ranging from 11 to 18%. Medicare beneficiaries can buy the cards for up to $30 and obtain discounts on drugs they purchase at neighborhood pharmacies or by mail order. The most financially disadvantaged people receive the cards for free and are given $600 a year to fill their prescriptions. The card program is a temporary measure that will be replaced by prescription drug coverage under Medicare in 2006.

FIGURE 5.2