WEDNESDAY, Feb. 23, 2005 (HealthDay News) -- With a new Medicare drug benefit taking effect in 2006, the government will be picking up the tab for nearly half of all health-care costs within the next decade, a new report predicts.

It's a record proportion of total health spending that could have important implications for the entire national budget, according to the report's authors, who released their projections Wednesday at a Washington, D.C., briefing co-sponsored by the Kaiser Family Foundation and the journal Health Affairs.

"The whole idea of money moving from a private share to a public share is interesting," said Paul Fronstin, a senior research associate with the Employee Benefit Research Institute, a nonpartisan research group. "It seems to me it gives proponents of national health insurance ammunition to further make their argument that the government is already spending half; why not go the full amount and provide coverage for everybody?"

The report's authors don't go that far. But they do conclude that forecasted increases in both public and private spending over the next 10 years portend "heightened pressure to find ways to slow cost growth without compromising quality or access." And those expected increases don't consider the huge influx of baby boomers who will become eligible for Medicare after 2014.

The analysis, posted on the Health Affairs Web site, is based on assumptions from the 2004 Medicare Trustees Report and estimates for the Medicare drug benefit that were part of the president's fiscal year 2006 budget proposal. Private spending projections are the result of economic modeling.

The 2004 figures in the report are estimates; final spending figures won't be available until January 2006.

Those estimates suggest health-care spending in the United States topped $1.8 trillion in 2004 and will continue to grow faster than the economy at large. By 2014, national health expenditures will near $3.6 trillion, representing 18.7 percent of the gross domestic product (GDP), up from 15.3 percent in 2003.

In 2004, health-care spending grew 7.5 percent, slowing from 7.7 percent the prior year, the report said. But there was a clear difference in the rate of spending growth by payer type: Private spending increased 7.4 percent in 2004, down from 8.6 percent in 2003, while Medicare spending rose 8.2 percent in 2004, up 2.5 percentage points from the prior year.

Lead author Stephen Heffler, director of the Centers for Medicare and Medicaid Services' (CMS) National Health Statistics Group, said government's growing health-care burden reflects a series of historical events. They include the 1960s implementation of Medicare, the fast growth of Medicaid over the years, and the expansion of health coverage to low-income children through the State Children's Health Insurance Program.

The addition of prescription drug benefits to Medicare is the latest government expansion. And while it won't inflate the overall rate of health spending, it will result in a substantial shift in funding from Medicaid and private payers to Medicare in 2006, Heffler and his CMS colleagues predict.

That's partly because "dual-eligible" Medicare-Medicaid recipients will begin receiving drug coverage through Medicare. It's also assumed that some employers will drop drug coverage for their retirees.

Some policy watchers say that trend bodes dire consequences.

"Current retirees bumped from private insurance to Medicare will be shocked to discover how badly their benefits will deteriorate," warned Bernie Horn, policy director for the Center for Policy Alternatives, an advocate for progressive policies in health care.

"Right now, those retirees generally have a small deductible and co-pays of $10 to $25," Horn explained. "Under Medicare, they will have premiums of $420 per year, a deductible of $250; then they have to pay a co-pay of 25 percent, which could be a lot higher than $10 to $25. Then, at $2,250 in yearly drug spending, they hit the 'doughnut hole' where Medicare pays nothing at all."

Beneficiaries who spend $800 or less on drugs in a year would actually lose money by participating after considering the cost of premiums, a deductible and co-payments, he added.

Meantime, the authors predict that growth in prescription drug spending will decelerate to 8.7 percent in 2014 due to a slowdown in prescription drug use. Increased cost sharing and the movement of more drugs to over-the-counter status will help to reduce demand, they said.

By the end of the decade, drug spending will constitute less than 15 percent of total health expenditures. That compares with 28 percent for hospital care and 22 percent for physician and clinical services. Still, prescription drugs are growing faster than any other good or service in health care, Heffler noted.

And while national health spending will continue to outpace growth in the economy overall, health economist Mark V. Pauly, chairman of the Health Care Systems Department at the University of Pennsylvania's Wharton School in Philadelphia, says it shouldn't be much of a concern. Health care's expanding share of the GDP mostly reflects beneficial but costly new medical technology and wages that are rising more rapidly than wages in the general economy to attract more nurses to the profession, he explained.

And Pauly added, "If people prefer to spend on improving their quality and quantity of life rather than a plasma TV, that would be good."

More information

Read about the government's health spending projections .

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