NATIONAL HEALTH EXPENDITURES, 1994

Spending Growth Is Lowest in More Than Three Decades

Overview: National health expenditures rose to $949.4 billion in 1994, a 6.4 percent increase from 1993, the Health Care Financing Administration reported. In 1994, health spending amounted to an estimated average of $3,510 per person, $179 more than in the previous year.

The 1994 increase in health expenditures was the slowest growth rate recorded in more than three decades. Between 1988 and 1992, double-digit and near double-digit growth occurred in aggregate health care spending. However, health expenditure growth slowed to 7 percent in 1993 and 6.4 percent in 1994.

Slower growth in health spending, combined with healthy growth in the gross domestic product (GDP), led to only a small increase in health care spending as a share of GDP: from 13.6 percent in 1993 to 13.7 percent in 1994. GDP is the total value of goods and services produced in the United States.

Public spending

In 1994, the public share of health spending increased to 44.3 percent from 43.4 percent in 1993. Medicare accounted for 40.2 percent of the public share and Medicaid (including state funds) for 30.7 percent.

From 1969 to 1993, growth in spending for benefits by the two largest private and public payers--private health insurance and Medicare--was comparable. However, in 1994, private health expenditures grew 4 percent, while Medicare expenditures increased 11.8 percent. However, when enrollment growth, benefit coverage and policy effects are factored in, Medicare's growth rate is more comparable to that of private payers.

Medicare

While private and Medicare benefit growth rates appear unusually far apart, certain factors tended to exaggerate the growth rate of Medicare benefits, especially in 1994. These factors include enrollment growth, benefit coverage, and government regulatory and policy effects:

- Enrollment growth. The growth rates reflect total spending, and enrollment in Medicare grew during 1994 while enrollment in private health insurance decreased slightly. The number of Medicare beneficiaries increased 1.8 percent in 1994, while net enrollment in private health insurance decreased 0.1 percent. - Benefit coverage. Medicare funds different levels of benefit coverage than private health insurance. For example, Medicare covers substantial quantities of long-term care services, such as home health and skilled nursing facility stays, which are funded less frequently by private health insurance. These services have been growing more quickly than other services, such as hospital and physician services, which are covered by both Medicare and private health insurance. Medicare also covers end stage renal disease and hospice care. - Regulatory and policy effects. The Medicare volume performance standard (MVPS), designed to control growth in the volume of Medicare physician and other professional services, was introduced in 1990 and incorporated into the fee schedule in 1992. MVPS affected the 1994 Medicare growth rate in benefits by paying a bonus to physicians for their restraint in volume growth in 1992. These bonuses increased overall expenditures for Medicare in 1994. Higher volume growth, which will be penalized by reductions in fee increases in 1996, also contributed to Medicare's spending growth. Private health insurance does not have comparable payment adjustments.

If adjustments are made for these factors, the difference between Medicare and private health insurance growth narrows considerably, to 5.6 percent per enrollee for Medicare and 3.6 percent per enrollee for private health insurance.

In 1994, the Medicare program spent $166.1 billion for benefits, accounting for 20 percent of total personal health care spending. Medicare provided health coverage for 36.9 million aged and disabled persons.

Medicaid

Combined federal and state spending on Medicaid totaled $122.9 billion for personal health care in 1994, which accounted for 14.8 percent of total personal health care spending. Since 1992, growth in Medicaid spending has been decelerating, slowing to 7.7 percent in 1994. The federal share of Medicaid spending for personal health care was $78.4 billion in calendar year 1994, while the state and local share was $44.5 billion. Legislation that imposed state limits on disproportionate share hospital payments and recent deceleration in beneficiary growth seem to have helped control growth in Medicaid program expenditures.

The data on national health spending will be published in the spring edition of the HCFA Review, HCFA's quarterly journal. A shorter article was published today in Health Affairs, the quarterly journal of Project HOPE.

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