By David S. Hilzenrath
Washington Post Staff Writer
Tuesday, January 13 1998; Page D01

Growth in the nation's health care spending reached a 37-year low in 1996 amid the spread of managed care, according to a federal study released yesterday.

Nonetheless, economists and health care analysts found little cause for celebration, saying that the 1996 figures are already outdated and that health care spending is again accelerating.

"All experience suggests that. . . . we haven't slayed the health cost monster and that it will return," said Drew Altman, president of the Henry J. Kaiser Family Foundation, which sponsors research on health care.

The aging of the nation's population, the advent of costly new medical technologies and diminishing returns from the managed-care revolution all augur sharper spending increases in coming years, experts say.

Spending on health care rose 4.4 percent in 1996, down from 4.8 percent in 1995 and 8.3 percent in 1993, when spiraling costs were making health care reform a top priority for President Clinton, the report said. The 1996 figure was the smallest increase since the government survey began in 1960.

Though as recently as 1993 annual increases in health care spending sharply outpaced overall economic growth, the trend was reversed in 1996, when the gross domestic product expanded by 5.1 percent, according to the report by researchers at the Health Care Financing Administration. It appears in the current edition of the journal Health Affairs.

Spending on health care topped $1 trillion for the first time in 1996. That was $3,759 per person, up $126 from 1995. From 1993 through 1996, health care consumed a steady 13.6 percent of the gross domestic product; the annual variations were lost in the rounding off process.

Low overall inflation contributed to the trend toward slower growth in health care spending, the report said. But within the medical arena, the driving force appears to have been the rapid spread of preferred-provider organizations, health maintenance organizations and other forms of managed care, the increasingly dominant movement to control costs.

In 1996, more than three-quarters of privately employed workers were covered by managed-care plans, up from less than half just four years earlier, according to a survey by A. Foster Higgins & Co., a consulting firm.

Managed-care premiums are typically lower than conventional insurance premiums, so spending tends to decline as people switch to managed care. As the mass conversion runs its course, the one-time savings dry up.

Meanwhile, pent-up pressures are prompting many managed-care plans to boost their premiums. Amid an industry price war and a grab for market share, many plans held their rates at unprofitable levels. They are now being forced to compensate.

The health plans have already reaped most of the easy savings by squeezing payments to doctors and hospitals and reducing hospital stays, analysts say. Keeping costs in check could require more dramatic efforts.

"We haven't really begun to scratch the surface of the . . . changes that we're going to need if we're going to get this genie back in the bottle," said Henry E. Simmons, president of the National Coalition on Health Care, which includes big employers and labor unions.

Even as cost increases slowed in 1996, the percentage of Americans without health insurance grew, and that suggests it could be more difficult to solve the problem of the uninsured in the years ahead, said Kenneth E. Thorpe, a professor of health policy at Tulane University.

The Congressional Budget Office predicts that spending on health care will resume growing faster than the economy as a whole again this year, a CBO analyst said. Looking further into the future, the CBO predicts that health costs will be growing at a rate of 6.5 percent in 2008, compared with overall economic growth of 4.7 percent -- still a long way from the double-digit annual increases of the late 1980s and early 1990s.

Growth in hospital spending ticked up in 1996, to 3.4 percent from 3.3 percent in 1995, according to the report. Meanwhile, spending on physician services slowed to 2.9 percent from 3.1 percent a year earlier.

One rapidly growing category was prescription drugs, up 9.2 percent in 1996 from 7.4 percent in 1995. Some big drug companies have been increasing their profits even faster than their sales, said analyst Samuel D. Isaly of OrbiMed Advisors.