Nation’s spending on health continues to rise

updated 8:07 a.m. ET Jan. 6, 2009

WASHINGTON - Health care continued to take up a greater share of the economy in 2007, as spending on hospitals, doctors and other services increased 6.1 percent to $2.2 trillion.

There was a silver lining in the numbers the government reported Monday: The increase in health spending was the smallest since 1998, thanks largely to the growing use of generic drugs.

Officials worry that devoting more resources to health care makes it harder for families to meet other priorities and for businesses to compete internationally.

Overall, health spending came to $7,421 per person for the year.

About 67 percent of medications dispensed in 2007 were generic drugs — up from 63 percent the year before. Generics can cost as little as one-third the price of brand-names.

Several factors helped drive the trend. First, insurers are steering consumers to lower-priced medicines by charging low co-payments for certain drugs. Meanwhile, they charge higher co-payments for medicines they want consumers to avoid for safety and financial reasons.

Large retailers and grocers are enticing consumers into their stores with low-priced generics.

Also, several blockbuster brand-name drugs lost their patent exclusivity in 2006, generating competition. Notable examples include Flonase, an allergy medicine; Zocor, a medicine used to lower cholesterol; and Zoloft, which is used to treat depression.

Federal officials said safety concerns also probably influenced spending on medicine as the Food and Drug Administration issued more of its most serious warnings than in previous years — 68 in 2007 versus 58 the year before and 21 in 2003.

The overall spending slowdown in 2007 came also from a decrease in administrative expenses for the new Medicare drug benefit. When the program kicked in during 2006, it generated a substantial uptick in administrative expenses.

Officials emphasized that the good news about slowing the increasing costs of health care extended only to prescription drugs. All other major health sectors — such as hospitals, physicians, nursing homes and home health — grew at the same rate or slightly faster than the year before.

Since prescription drugs generate only about 10 percent of all health spending, officials question how much longer the transition to generics would dampen the growth in health care costs.

“I wouldn’t expect the good news to continue,” said Richard Foster, chief actuary for the Centers for Medicare and Medicaid Services.

Historically, health spending has been somewhat insulated from the effects of a slowing economy, which means health care makes up an even greater share of the overall economy during recessions. In 2007, the health sector’s share came to 16.2 percent, up from 16 percent the year before.

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