CMS: 2008 Medical Inflation Much Lower

The Centers for Medicare and Medicaid studies released its report on health care spending in 2008 – published in Health Affairs on Monday and covered extensively in the press.   The good news is that health care inflation overall was lower than it’s been for years (4.4%).  The bad news is that health care inflation continued to outpace growth in the economy – so health care moved from 15.9% to 16.2% of GDP. 

Some of the conclusions that have been widely reported 
- Health care is not immune to the effects of severe recessions
- Hospital inflation decreased to 4.5% - and hospital prices only went up 3%
- Physician services increased by 5% - the slowest rate since 1996.  Medicare physician spending, however, increased by 7.8%
- Prescription drug spending increased only 3.2% - continuing a trend of relatively low pharmaceutical inflation with the onset of many new generics and without big blockbusters coming out of the pipeline. Still, most of this increase was price (2.5%) as opposed to utilization.
-Medicare spending was up 8.6% - and growth in Medicare Advantage plans played a role.  Big cuts in Medicare Advantage reimbursement in health care reform could now have an impact on more constituents.
- Medicaid spending increased.

One observation that has not been covered extensively.  The government pays much lower rates (especially Medicaid). Therefore, a shift of a patient from commercial health insurance plans to Medicaid could  easily mean a decline of 50% in reimbursement to many hospitals.  If providers shift these costs by charging private insurers more, then there are no “real” savings.  On the other hand, if providers see decreases in revenue and reengineer their processes to allow for sustainability at lower reimbursement, then the increased government role should lower unit prices.

I’ve often blogged about the problem we have with unit price in the United States.  The CMS article has a great graphic (below) showing the role that price inflation (compared to utilization inflation) has played over the last 30 years.

 (click the image to enlarge it)