Health Spending Increases

The Centers for Medicare and Medicaid Services (CMS) reports that total health care spending will grow from its current 16.2 percent of the economy to 20 percent by 2015. This translates to each person spending $12,320 annually, according to USA Today. Nationally projected, we will spend more than $4 trillion on health care by 2015. For a shocking comparison, Mark Zandi, chief economist at Moody’s Economy.com, said that manufacturing now equals about 20 percent of our economy.


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Consumers are expected to provide half of the $4 trillion, while the government provides the rest, according to the journal Health Affairs. The Associated Press reports that drug costs are expected to fall, with greater reliance on generics. Hospital costs are projected to rise due to a construction boom for urban hospitals. Discounts negotiated by insurers administering the new Medicare drug program will also be steeper than anticipated.

The hurricanes that struck the Gulf coast last summer also increased federal public health program spending by 24.3 percent, to $11.3 billion in 2005, compared with 5.7 percent in 2004, according to USA Today. With the new Medicare drug program coming online, the federal government’s share of prescription drug spending rose from 2 percent to 27 percent. The program assumes payments formerly made by seniors who purchased their own drugs, as well as state Medicaid programs.

Zandi told USA Today, “In the near term, it’s a plus … a steady source of jobs and income. In the longer term, it’s an increasing amount of economic resources going to a part of the economy that may not enhance underlying productivity.” Paul Ginsburg, an economist at the Center for Studying Health System Change said, “The more expensive our system becomes the bigger the gap between the health care haves and have-nots.”

President Bush pressed for the use of health savings accounts (HSAs) and high-deductible insurance plans in his latest State of the Union address. This is expected to make thriftier consumers of us. John Poisal, CMS’s deputy director of National Health Statistics, told the Associated Press, “We don’t expect HSAs to proliferate so dramatically that we would have an impact similar to that of the managed care era of the ‘90s.” Poisal continued, “It’s consumption and investment but primarily it’s about consumption.”

Projections of a 7.2 percent annual increase in health care costs in the coming decade are in line with the 7.4 percent increase seen in 2005. Analysts told the Associated Press, “These changes could force payers and providers to re-examine fundamental questions regarding the delivery and financing of health care services.”

The Associated Press reports 2015 spending on nursing homes will increase to $216.8 billion, a 178 percent increase over the $121.7 billion spent in 2005. Home health is currently the fastest growing sector and will increase to $103.7 billion in 2015. Home health spending was $49 billion in 2005, almost a 212 percent increase.

In other economic news, consumer prices rose 0.7 percent in January, with energy and food costs surging. Wall Street forecast a 0.05 percent increase. Richard Sichel, chief investment officer at the Philadelphia Trust Company, told Reuters, “We can’t dismiss the 0.7 number because people actually do spend money on food and energy, that’s something to be thinking about and that’s something the Fed might have to be thinking about.”

Reuters reports energy costs rose 5.0 percent in January alone, with a 0.5 percent increase in food costs and a 1.8 percent bump in transportation costs, according to the Labor Department. Specifically, gas prices rose 6.4 percent, electricity saw a record 5.5 percent advance, natural gas was up 1.7 percent, while fuel oil fell 1.9 percent.

Hugh Johnson, Johnson Illington Advisors chief investment officer, told Reuters, “It’s very clear that higher energy prices are now being passed along to consumers, and it’s not difficult to do that when the economy is as strong as it is. This will put additional pressure on the Federal Reserve to continue to raise short-term interest rates.”

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