HEALTH CARE FINANCING

National Health Spending
According to estimates by the Health Care Financing Administration (HCFA), national health expenditures (NHE) in the United States totaled $949.4 billion in 1994, representing about 13.7 percent of the nation's gross domestic product (GDP). U.S. per capita spending -- total spending divided by the population -- amounted to $3,510. When measured on either a per capita basis or as a percentage of GDP, U.S. health spending far out paces that of any other nation. Table 1 shows aggregate NHE for selected years from 1960 to 1994 and provides a break down of health spending by category.

Is Health Spending Growth Slowing?
After five years of double-digit and near double-digit growth in health spending between 1988 and 1992, U.S. health expenditure growth decelerated to 7 percent in 1993 and 6.4 percent in 1994. The 6.4 percent growth rate was the slowest recorded in more than three decades. Even at this relatively low rate, U.S. health spending still grew faster than the GDP. When economy-wide inflation is removed from these expenditure estimates, policy analysts have found that health spending still grew at a real rate of 4 percent.(footnote 9)

While this slowed growth is a welcome respite, analysts warn that a two-year observation does not necessarily constitute a long-term trend. Policy makers point to a number of factors that could explain the decelerating growth. Anecdotal evidence suggests that insurers' profits are being squeezed as they offer employers lower premiums in competition with other firms to increase their market share. Second, surveys of employer-sponsored private health insurance show that part of the slow down in premium growth in 1994 and 1995 resulted from the switch of employers' coverage from conventional to managed care plans.(footnote 10)

In addition, some analysts contend that the slower growth was partly in response to the possibility of government intervention in the form of national health reform. That is, the threat of explicit cost controls provided enough uncertainty to have a self-disciplinary effect on the health sector. Analysts point to historical evidence to support this theory. The last time real health spending growth slowed this dramatically was in 1978 and 1979 while Congress was debating President Carter's proposals for hospital cost control and was awaiting his proposed health care financing plan. After the threat subsided, real growth continued to escalate dramatically throughout the 1980's.(footnote 11)

At present, the longer term prospects remain unclear. Only time will tell if the recent slow-down in health spending growth will be a short-lived aberration or develop into a long-term trend.

Table 1 - National Health Expenditures (in Billions) Selected Years 1960-1994

Personal Health Care Expenditures
As shown in the previous table, personal health care expenditures (PHCE) are a subcategory of national health expenditures. PHCE measures spending on therapeutic goods or services rendered to treat or prevent a specific disease or condition in a specific person.(footnote 12) This includes hospital care, physician services, dental services, home health services, nursing home care, drugs, vision products and other personal health care goods and services. A recent article in the Health Care Financing Review provided a break down of PHCE for the nation, as well as by region and by state.(footnote 13) The data presented are from calendar year 1993.

The New England region led the nation in health spending per capita. In 1993, New England's PHCE spending averaged $3,585, 19 percent higher than the national average of $3,020. Among individual states, Connecticut ranked second highest in the nation with a per capita PHCE of $3,727; only Massachusetts spent more per capita in 1993 -- $3,892.

Connecticut's total PHCE exceeded $12.2 billion in 1993 and represented about 11.7 percent of its gross state product (GSP). GSP measures the total value of goods and services produced in a particular state. Therefore, nearly 12 cents out of every dollar spent in Connecticut paid for health related goods or services in 1993. The graph that follows shows Connecticut's total PHCE spending from 1980 to 1993. These increases represented an average annual growth of 11 percent for the period, which was somewhat higher than the national average of 10.3 percent.

Nationwide, the distribution of services among the PHCE categories shifted significantly between 1980 and 1993. Hospital care remained the single largest component of PHCE, but its prominence declined from 46.9 percent in 1980 to 41.6 percent in 1993. In Connecticut, this trend was even more pronounced; hospital care went from 44.3 percent of PHCE in 1980 to 35.9 percent in 1993. Only two states -- Minnesota and Washington -- spent less than Connecticut on hospital care as a percentage of PHCE.

Table 2: Personal Health Care Expenditures in Connecticut: 1993

Most of the decline resulted from public and private actions aimed at reducing the growth of hospital spending. These included the implementation of the Medicare prospective payment system (PPS) and the tightening of admission and length-of-stay guidelines by private health insurers. Larger shares of PHCE for physician services, other professional services, and home health services offset most of the decline in hospital care. The table below illustrates changes Connecticut's personal health care expenditures over time. The last column shows average annual percentage growth from 1980 to 1993.

Table 3 - Connecticut Personal Health Care Expenditures (in Millions)
Selected Years 1980-1993

The amount a state spends on health care is influenced by a number of factors, including the age distribution of its population. The elderly -- those age 65 and above -- consume four times as much health care as those under age 65. At 14.1 percent, Connecticut was eleventh in the nation for population age 65 or above in 1993. This percentage ranked above both the national average of 12.7 percent and the New England region's rate of 13.9 percent. In 1980, Connecticut had approximately 368,000 elderly residents (or 11.8 percent), compared with 461,000 in 1993.

This demographic trend is evident in one particular area of personal health care spending. On average, the United States spent about 8.5 percent of PHCE on nursing home care in 1993. By contrast, Connecticut spent 14.3 percent of PHCE on nursing care and ranked first in the nation in this category.

Sources of Funding
From 1989 to 1994, the share of U.S. health spending funded by the public sector increased from 40.5 percent to 44.3 percent. The major public sources include Medicare (18 percent), Medicaid (14 percent), and state and local government programs (12.3 percent). The two major private sources of health care funding are private health insurance (34 percent) and out-of-pocket expenditures (18 percent). Table 4 breaks out national health expenditures by funding source and by expenditure category.

Table 4 - National Health Expenditures, By Source of Funds and Type of Expenditure
(in Billions of Dollars) Calendar Year 1994

Sources of Health Spending in Connecticut
Traditionally, compared with the nation as a whole, a greater proportion of Connecticut's health spending has been funded by private insurance. In 1992, for example, private insurance covered 37 percent of health spending in Connecticut. Public sources covered a total of 41 percent. These sources included Medicare (17 percent), Medicaid (14 percent), and other state and local government programs (10 percent). The balance of Connecticut's health spending (22 percent) was funded through out-of-pocket payments by consumers.(footnote 14)

In recent years, several trends have increased the percentage of health care expenses funded by public programs. First, a greater number of Connecticut residents have turned age 65 and have enrolled in Medicare. Second, due to the economic downturn, a larger proportion of the population has lost private insurance coverage. Lastly, Medicaid eligibility has been expanded, enabling the program to cover more Connecticut residents.

Medicare Expenditures
Medicare primarily funds acute-care (hospital and physician) services for aged and disabled enrollees. In 1993, Medicare financed a total of $150.4 billion (or 19.3 percent) of U.S. personal health care expenditures for over 35.5 million enrollees.

In Connecticut, approximately 490,000 residents were Medicare enrollees in 1993. Medicare personal health care expenditures for this group amounted to $2.134 billion in 1993 (or 17.5 percent of Connecticut's total PHCE). The table that follows shows the Medicare PHCE break down for Connecticut.

Table 5 - Medicare Expenditures for Personal Health Care in Connecticut: 1993

In Connecticut, Medicare personal health care expenditures have grown from about $513 million in 1980 to $2.134 billion in 1993. This represented an average annual growth rate of 11.3 percent for the period, slightly less than the national rate of 11.6 percent.

Medicaid Expenditures
Medicaid, the joint federal-state program, provided medical services for nearly 32.7 million low income recipients nationwide. In 1993, Medicaid financed a total of $112.8 billion (or 14.5 percent) of U.S. personal health care expenditures.

In Connecticut, approximately 334,000 residents were Medicaid recipients in 1993. Medicaid personal health care expenditures for this group amounted to nearly $2 billion (or 16.4 percent of Connecticut's total PHCE). Table 6 shows the Medicare PHCE break down for Connecticut. (footnote 15)

Table 6 - Medicaid Expenditures for Personal Health Care in Connecticut: 1993

In Connecticut, Medicaid personal health care expenditures have grown from about $346 million in 1980 to $1.998 billion in 1993. This represented an average annual growth rate of 14.7 percent for the period, somewhat above the national rate of 12.5 percent.

The Disproportionate Share Hospital (DSH) Program
Much of the growth in the Medicaid program in the early 1990's was primarily due to the disproportionate share hospital (DSH) program. The DSH program was originally enacted in 1981 and later expanded in 1987. The intent of the program was to assist hospitals with high volumes of Medicaid recipients and low-income uninsured patients. In short, the idea was to help hospitals recover part of their costs for serving these populations through supplemental Medicaid payments. Beginning in 1989, DSH payments began to grow dramatically. DSH funding represented 22.2 percent of Connecticut's total Medicaid spending in 1992 and 21.5 percent in 1993.

In Connecticut and six other states, Medicaid DSH payments actually exceeded regular Medicaid payments for inpatient hospital services in 1993. In addition, 14 states (including Connecticut) received mental health DSH payments that far exceeded their regular spending for mental health. As a result of rapid growth and these types of anomalies, the federal government has instituted two ceiling limits on DSH payment adjustments, one state-specific and one facility-specific that have capped the growth of the program:

1. The state-specific ceiling limits each state's spending for DSH payment adjustments to 12 percent of the state's total Medicaid spending for the year. This ceiling is being phased in over time to help some "high DSH States" adjust.
2. The facility-specific payment ceiling limits a state's DSH payment adjustments to any individual hospital to the cost of furnishing hospital care, both inpatient and outpatient, to Medicaid eligible and uninsured patients, less the amount the hospital received in basic Medicaid reimbursements for the services it provided to eligible individuals.(footnote 16)

Health-Related Spending in the State Budget
In 1995, the Office of Health Care Access (OHCA) did an analysis of state health-related spending for fiscal year 1994-95. Overall, the state spent $2.98 billion on health care or approximately 26.8 percent of total state expenditures. By far, the largest budget item was Medicaid, which totaled more than $2 billion. The next largest expenditure was for the state employee ($243.4 million) and state retiree ($80.4 million) health insurance. Other major accounts included: the Department of Mental Health ($156.8 million), the University of Connecticut Health Center ($79.8 million), Worker's Compensation ($65.8 million), and the Department of Health and Addiction Services ($56.8 million).(footnote 17)

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