updated 1/9/2007 8:39:40 AM ET 2007-01-09T13:39:40

Health care spending grew in 2005 at the slowest pace in six years thanks in part to a greater reliance on generic drugs.

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Health spending went up 6.9 percent in 2005, approaching $2 trillion. That represents about $1 out of every $6 spent in the U.S., compared with about $1 out of every $10 in the early 1980s.

Private and public payers for health care, such as insurers, states and the federal government, have said such a spending pattern cannot be sustained without harming the economy. Some of the tools they’ve put in place to slow health care spending appear to have had an impact.

The slower growth in 2005 is good news for consumers and taxpayers, but economists aren’t confident that the trend will last.

Richard Foster, the chief actuary for the Centers for Medicare and Medicaid Services, said there is a growing demand for expensive lifesaving equipment and procedures.

“We don’t see much that is going to change that for a long time to come,” Foster said.

The data on health care spending was compiled by the Centers for Medicare and Medicaid Services. The complete study was published in the journal Health Affairs.

Officials said prescription drugs played the most important factor in slowing health-care spending in 2005. The growth in spending on medicine was lower than overall spending on health care for the first time since the early ’90s.

In the past five years, insurers have sought to slow drug spending by giving customers an incentive to buy generics or low-cost brand name drugs. For example, they require customers to pay only a nominal fee for certain medicines, say $3. However, for medicines they’d rather the customer not take, they’ll require the customer to pick up a much larger share of the drug’s costs, say 20 percent. The use of such tiering has become standard practice by insurers.

Lower prices for medicine
States also took steps to rein in costs. They pooled together to negotiate lower prices for the medicine they provide the poor and elderly in Medicaid. They also encouraged the use of generics. As a result, drug spending by states went from an 11.6 percent increase in 2004 to just 2.8 percent in 2005.

The slower growth in drug spending in 2005 had nothing to do with the new Medicare benefit, which did not go into effect until 2006. However, the slower growth in drug spending should help lower the cost of the program, which was implemented using the higher projections for the coming decade.

Meanwhile, the growth in spending on hospital care was comparable in 2005 to previous years — about 7.9 percent. The growth rate is greatly influenced by labor costs. During the past five years, the pay and benefits provided hospital workers increased 8.2 percent annually, which is about the same as the increase in overall hospital spending.

“This continued increase in labor costs was driven in part by a sustained shortage of hospital workers,” said government economists who wrote about the spending patterns in a health journal article released Tuesday.

Among other health care providers, spending on nursing home care went up 6 percent. Spending on care provided at physician offices and clinics went up 7 percent.

Officials also noted that spending on health care is concentrated. About 2 percent of U.S. consumers account for about a third of expenditures.

The economists said that health-care spending often increases at a much faster rate than the overall economy during recessions and in the years immediately following. The trend in 2005 was consistent with past post-recession periods.

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