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Spending on Health Care Increased Sharply in 2001

By Robert Pear for the New York Times

WASHINGTON, Jan. 7 Spending on health care is increasing at the fastest rate in a decade, reflecting greater use of hospitals and prescription drugs and the declining influence of managed care, the government reported today.

The steep increase in spending has put immense new pressures on consumers, employers and public programs.

In 2001, health spending rose 8.7 percent, to $1.4 trillion, and accounted for 14.1 percent of the total economy, the largest share on record, the report said.

Spending averaged $5,035 for each person in the United States. The increase came even as the nation slipped into a recession, exacerbated by the terrorist attacks of Sept. 11, 2001.

Experts say the rapid growth may lead to new efforts to rein in health costs.

"Historically, increases of this size have been closely followed by government policy changes or private sector initiatives to put the brakes on health care spending growth," said Katharine R. Levit, an economist who supervises preparation of the government's annual report on health spending.

The steep increase adds to the burden on states, wrestling with severe fiscal problems, and private businesses, struggling with a soft economy. It also intensifies pressure on Congress to move health care to the top of its agenda.

The major reason for the increase in health spending, Ms. Levit said, was an increase in the amount of medical goods and services purchased to care for an aging population.

"There was some increase in prices, but it was not as large as the increase in quantity," Ms. Levit said. The increase in quantity took many forms: more days spent in hospitals, more outpatient services, more diagnostic tests, more prescriptions and greater use of new technology, which has the potential to extend life and improve its quality.

At the same time, consumers have flocked to looser forms of managed care, which impose fewer restrictions than health maintenance organizations.

"Managed care's influence has waned in the last few years, contributing to acceleration in hospital and overall health spending," Ms. Levit said.

Medicare spending, for the elderly and disabled, rose 7.8 percent in 2001, while spending under Medicaid, the federal-state program for low-income people, soared 10.8 percent. The growth of Medicaid was driven by an increase in enrollment, resulting from the recession and from state efforts to expand coverage.

The report, published today in the journal Health Affairs, describes prescription drugs as the fastest-growing category of health spending. The nation spent $140.6 billion on such medicines in 2001, up 15.7 percent from the prior year. In 2001, for the first time, spending on drugs exceeded spending on nursing homes and home health care combined.

Representative Jim McCrery, Republican of Louisiana, said the surge in health spending was alarming. "If we don't find a way to reduce the rate of increase in health costs," Mr. McCrery said, "we'll end up with a government-controlled health care system in which we control costs by rationing."

Democrats said the new data to supported their view that Medicare was more efficient than private insurance.

"Medicare increased payments to providers such as hospitals, home health agencies and nursing homes and still managed to keep overall spending growth to 7.8 percent in 2001," said Representative Pete Stark, Democrat of California. "Meanwhile, private insurance premiums went up 10.5 percent. Given these results, I cannot understand why Republicans continue to devise plans for turning Medicare over to private health insurers and H.M.O.'s."

But Republicans said that consumers had little incentive to shop for bargains in the health care market because they were insulated from most costs. Of every $100 spent on health care, consumers pay $14 from their own pockets, for co-payments and deductibles and items not covered by insurance.

Even though 41 million Americans are uninsured, the United States devotes more of its economy to health care than other industrial countries. In 2000, health accounted for 10.7 percent of the gross domestic product in Switzerland, 10.6 percent in Germany, 9.5 percent in France and 9.1 percent in Canada, according to the Organization for Economic Cooperation and Development.

From 1992 to 2000, while the United States experienced the longest economic expansion in its history, health spending grew rapidly, but so did the economy. As a result, health care accounted for a stable share of the gross domestic product, 13.1 percent to 13.4 percent. But in 2001, the share grew eight-tenths of a percentage point, the largest increase on record.

The increase is a "warning signal," Ms. Levit said, adding: "We can move about two-tenths of a percent of our economic output to health care each year without too much pain. But when we see these sudden spikes, the adaptation we have to go through in order to pay for it is usually more than we can bear."

The growth in drug spending eased in 2001, after increases of 16.4 percent in 2000 and 19.7 percent in 1999, as fewer new drugs entered the market and employers raised co-payments in a successful effort to encourage greater use of generic drugs.

Pharmaceutical companies say prescription drugs still account for a relatively modest share of total health spending, 9.9 percent in 2001, compared with hospitals and doctors, which together account for more than half.

Spending on hospitals rose at the fastest clip since 1991, reaching $451.2 billion in 2001, up 8.3 percent from the prior year.

In 2001, spending for doctors and clinical services rose 8.6 percent, to $313.6 billion, the government reported. Ms. Levit said the growth probably resulted from increases in imaging procedures and in visits to doctors' offices. Drug advertising, she said, prompts some people to visit doctors to get prescriptions.

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