Health care spending growth in the United States accelerated slightly in 2006, increasing 6.7 percent compared to 6.5 percent in 2005, which was the slowest rate of growth since 1999. Health care spending, however, continues to outpace overall economic growth and general inflation, which grew 6.1 percent and 3.2 percent, respectively, in 2006.Out-of-pocket spending grew 3.8 percent in 2006, a deceleration from 5.2 percent growth in 2005. This slowdown is attributable to the negative growth in out-of-pocket payments for prescription drugs, mainly due to the introduction of the Medicare Part D benefit. Out-of-pocket spending accounted for 12 percent of national health spending in 2006; this share has steadily declined since 1998, when it accounted for 15 percent of health spending. Out-of-pocket spending relative to overall household spending, however, has remained fairly flat since 2003. The CMS found that overall private spending growth slowed in 2006. Private health insurance premiums grew 5.5 percent in 2006, which was the slowest rate of growth since 1997. Benefit payment growth also slowed, from 6.9 percent growth in 2005 to 6.0 percent in 2006. The slower growth reflects, in part, a decline in private health insurance spending on prescription drugs. The ratio of net cost of private health insurance (the difference between premiums and benefits) to total private health insurance premiums was 12.3 percent in 2006, slightly lower than 12.7 percent in 2005. At the aggregate level in 2006, businesses (25 percent), households (31 percent), other private sponsors (3 percent), and governments (40 percent) paid for about the same share of health services and supplies as they did in 2005. However, spending shifts did occur within major sponsor categories due to implementation of the Medicare Part D benefit. Medicare’s share of federal spending increased from 29 percent in 2005 to 34 percent in 2006, while Medicaid’s share decreased from 45 percent to 40 percent. For households, the share of Medicare spending attributable to payroll taxes and premiums increased slightly in response to first-time Medicare Part D premiums. Conversely, the out-of-pocket spending share decreased slightly due, in part, to the newly available prescription drug coverage through Medicare Part D. Total Medicaid spending declined for the first time since the program’s inception, falling 0.9 percent in 2006. The introduction of Medicare Part D, which shifted drug coverage for dual eligibles from Medicaid into Medicare, contributed to the decline in Medicaid spending growth. Other reasons for the decline include continued cost containment efforts by states and slower enrollment growth due to more restrictive eligibility criteria and a stronger economy. Spending growth for most personal health care services slowed in 2006. Hospital spending, which accounts for 31 percent of total health care spending, grew 7.0 percent in 2006, a decrease of 0.3 percentage points from 2005 and a continued deceleration from 2002 (when growth was 8.2 percent). The 2006 growth rate was partially driven by lower utilization of hospital services, especially within Medicare as fee-for-service inpatient hospital admissions declined. Spending for physician and clinical services also slowed, increasing 5.9 percent in 2006, which is 1.5 percentage points slower than in 2005 and the slowest rate of growth since 1999. The slowdown was driven by a deceleration in price growth, fueled by a near freeze on Medicare payments to physicians (whose fee schedule update was 0.2 percent in 2006) that influenced private payers as well. The implementation of the Medicare Part D prescription drug benefit affected a variety of indicators, including rates of growth of prescription drug spending and the share of drug spending accounted for by Medicare. The Medicare Part D benefit contributed to an increase in total Medicare spending, which grew 18.7 percent in 2006 compared to 9.3 percent in 2005. In addition, Medicare Advantage spending as a share of total Medicare spending increased from 14 percent in 2005 to 18 percent in 2006, in part due to a 25 percent increase in Medicare Advantage enrollment over the same period. At the same time, traditional fee-for-service enrollment declined 3.8 percent and its share of total Medicare spending fell from 86 to 82 percent. Prescription drug spending growth accelerated for the first time in six years—from a low of 5.8 percent in 2005 to 8.5 percent in 2006. Roughly half of this growth was due to increased use of prescription drugs, partly a result of coverage now available under Medicare Part D, as well as new indications for existing drugs, growth in therapeutic classes, and increased use of specialty drugs. However, a higher generic dispensing rate in 2006 helped to restrain prescription drug spending growth, which despite the acceleration still remained well below the average annual growth of 13.4 percent per year that occurred between the years 1995 and 2004. The higher rate of use of generic drugs was driven, in part, by the continued use of tiered co-payment structures, certain drugs going off patent, and the lack of new blockbuster drugs. Total prescription drug spending in 2006 was $216.7 billion, compared to $199.7 billion in 2005. Public funding sources, including Medicare and Medicaid, accounted for 34 percent of total drug spending, whereas in 2005 their share was approximately 28 percent. In addition to an increase in the share of prescription drug spending funded by public sources, the implementation of Medicare Part D also shifted Medicaid funding to Medicare for dually eligible individuals. Medicare’s share of total prescription drug spending increased from 2 percent in 2005 to 18 percent in 2006. Medicaid’s share of total drug spending fell from 19 percent in 2005 to 9 percent in 2006. Private funding for prescription drugs, including private health insurance and out-of-pocket spending, declined by 1.3 percent from 2005 to 2006; as a result, the private share fell from 72 percent in 2005 to 66 percent in 2006.

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