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How are costs contained?

  • Australia

    The major drivers of cost growth are the MBS and PBS. Government regularly considers opportunities to reduce spending growth in the Medicare Benefits Scheme (MBS) through its annual budget process and has established an expert panel to undertake a review of the entire schedule and report by the end of 2016.

    Government influences the cost of the PBS in making determinations about what pharmaceuticals to list on the scheme and in negotiating the price with suppliers. Government provides funds to pharmacies for dispensing medicines subsidized through the PBS and to support professional programs and the wholesale supply of medicines. This arrangement is through the current Community Pharmacy Agreement (the Community Pharmacy Agreements were instituted in 1991 and are subject to renegotiation every five years). The Sixth Community Pharmacy Agreement, which began in July 2015, supports AUD6.6 billion (USD4.3 billion) in savings through supply chain efficiencies.

    Hospital funding is set through policy decisions by the federal government, with states required to manage funding within their budgets.

    Through the 2015-2016 budget, the federal government also consolidated the back-office functions of a number of its health agencies to generate AUD106 million (USD69 million) in savings. Beyond these measures, the major control is through the capacity constraints of the health system, such as workforce supply.

  • Canada

    Costs are controlled principally through single-payer purchasing, and increases in real spending mainly reflect government investment decisions or budgetary overruns. Cost-control measures include mandatory global budgets for hospitals and regional health authorities, negotiated fee schedules for providers, drug formularies, and resource restrictions vis-à-vis physicians and nurses (e.g., provincial quotas of students admitted annually) as well as restrictions on new investment in capital and technology. The national health technology assessment process is one of the mechanisms for containing the costs of new technologies.

    The federal Patented Medicine Prices Review Board, an independent, quasi-judicial body, regulates the introductory prices of new patented medications. This measure ensures that prices are not “excessive,” on the basis of their “degree of innovation” and by comparison with prices of existing medicines in Canada and in seven other countries, including the United States and the United Kingdom. The board regulates “ex-factory” prices but does not have jurisdiction over wholesale or pharmacy prices, or over pharmacists’ professional fees. However, prices of all patented drugs are reviewed regularly, and the board can intervene if price increases are deemed excessive. Since 2010, the Pan-Canadian Pricing Alliance also coordinates, across provinces, negotiations to reduce the prices of branded drugs. Jurisdiction over prices of generics and control over pricing and purchasing under public drug plans (and, in some cases, pricing under private plans) is held by provinces, leading to some interprovincial variation. “Choosing Wisely Canada” is a new publicly funded campaign that provides recommendations to governments, providers, and the public on reducing low-value care.

  • China

    Health expenditures have risen significantly in recent decades as a result of health insurance reform, population aging, economic development, and health technology advances. Health expenditures increased from CNY510 (USD139) per capita in 2003 to CNY3,234 (USD884) in 2013 (China National Health and Family Planning Commission, 2014). The key cost-containment strategy is reform of provider payment. Prior to the recent introduction of DRGs, global budgets, and capitation in 2009, fee-for-service was the main provider payment mechanism and consumer- and physician-induced demand increased costs significantly. Global budgets in particular have been used in many regions, since these are relatively easy for authorities to implement. As noted above, government encourages use of community and township hospitals over more-expensive care provided in tertiary hospitals. Hospitals compete on the basis of quality, level of technology, and copayment rates.

    In township, community, and county hospitals, a campaign of “zero markups” for prescription drugs was introduced in 2013.The National Development and Reform Commission places stringent supply constraints on new hospital buildings and hospital beds, and the National Health and Family Planning Commission controls the purchase of high-tech equipment such as MRI scanners.

  • Denmark

    The overall framework for controlling health care expenditures is outlined in a “budget law,” which sets budgets for regions and municipalities and specifies automatic sanctions if they are exceeded. The budget law is supplemented by annual agreements between regions, municipalities, and government that coordinate policy initiatives to control expenditures. These include direct controls of supply.

    Block grants to regions are conditional on annual increases in productivity of 2 percent on the basis of diagnosis-related groups, and are withheld if productivity demands are not met. Even though the activity-based portion is small, it makes up regions’ marginal income and presents a strong incentive. Furthermore, regions are under pressure to deliver good performance, as they can be reformed if they do not deliver.

    At the regional level, hospital cost control includes a combination of global budgets and activity-related incentives.

    Inpatient pharmaceutical expenditure is controlled through national guidelines and clinical monitoring combined with collective purchasing. Two specific units have been established to evaluate and coordinate the introduction of expensive pharmaceutical products—the Council for the Use of Expensive Hospital Medicines (RADS) and the Coordinating Council for the First Use of Hospital Medicines (KRIS).

    Policies to control outpatient pharmaceutical expenditure include generic substitution, prescribing guidelines, and assessment by the regions of deviations in prescribing behavior. Pharmaceutical companies report a monthly price list to the Danish Health Authority, and pharmacies are obliged to choose the cheapest alternative with the same active ingredient, unless a specific drug is prescribed. Patients may choose more expensive drugs, but they have to pay the difference.

    Collective agreements with general practitioners and specialists include various types of clauses about rate reductions if overall expenditures exceed given levels. Regions also monitor the activity level of individual practices, and may intervene if they deviate significantly from the average.

    Health technology assessment and cost-effectiveness information, produced nationally and regionally, is an integrated part of the decision-making process for new treatments and guidelines for professionals.

    Regions may enter into contracts with private providers to deliver diagnostic and curative procedures. Prices for these services are negotiated between regions and private providers and can be lower than rates in the public sector.

    These measures have been relatively successful in controlling expenditures and driving up activity levels. General productivity in the hospital sector increased almost 20 percent from 2008 to 2012, while maintaining high patient satisfaction and also reducing hospital standardized mortality rates.

  • England

    Rather than using patient cost-sharing or imposing direct constraints on supply, costs in the National Health Service (NHS) are constrained by a global budget that cannot be exceeded. NHS budgets are set at the national level, usually on a three-year cycle. Clinical Commissioning Groups (CCGs) are allocated funds by NHS England, which closely monitors their financial performance to prevent overspending. They are expected to achieve a balanced budget each year.

    The current economic situation has resulted in a largely flat NHS budget against a backdrop of rising demand. Between March 2010 and March 2015, the NHS budget rose by between 0.6 percent and 0.9 percent (in real terms), versus the 5.6 percent growth between 1996–97 and 2009–10. NHS England estimated that the gap between rising demand and a continuation of this minimal increase in funding would be equivalent to GBP30 billion (USD42.4 billion) per year by 2020–21, assuming no additional efficiencies, but also that efficiencies equivalent to 2–3 percent of the annual budget are possible, versus a historic rate of 0.8 percent.

    Although some of the savings targets have been met in the past five years, the financial pressure on the NHS is being associated with some deterioration in quality of care—notably waiting time targets.

    Cost-containment strategies to date include freezing staff pay increases, supporting increased use of generic drugs, reducing DRG payments for hospital activity, managing demand, and reducing administration costs. There are a number of tools for local purchasers to maximize value by addressing unwarranted variations in utilization and clinical practice, provided by the government-funded “Rightcare” program. Local purchasers can also run competitive tenders for certain services.

  • France

    Statutory health insurance (SHI) has faced large deficits over the past 20 years, but it fell from an annual EUR10–12 billion (USD12.1–14.5 billion) in 2003 to EUR6.2 billion (USD7.5 billion) in 2014. This trend is due to a range of initiatives, including a reduction in the number of acute-care hospital beds; the removal of 600 drugs from public reimbursement; an increase in generic prescribing and the use of over-the-counter drugs; a reduction in the price of generic drugs; and a reduction of the official fees for self-employed radiologists and biology labs. Other cost-containment measures include central purchasing to better negotiate costs, increasing the share of outpatient surgery, and reducing duplicate testing. Competition is not used as a cost-control mechanism. Global budgets are used only in price–volume agreements for drugs or devices. As described above, patient cost-sharing mechanisms include increased copayments for patients who refuse generics or do not use the gatekeeping system.

    A number of initiatives to reduce “low-value” care, launched by SHI and the National Health Authority (HAS), include pay-for-performance to reduce prescription of benzodiazepines for elderly persons; reductions in avoidable hospital admissions for patients with heart failure; early discharge after orthopedic surgery and normal childbirth; information on the absence of the benefit of prostate cancer screening; using diagnosis-related group (DRG) payments to incentivize shifts to outpatient surgery; establishing guidelines for the number of off-work days according to disease or procedure; strengthening controls for the prescription of expensive statins and new anticoagulants; encouraging the use of Avastin over Lucentis, and other less costly biosimilar drugs; and testing the use of taxi vouchers, instead of ambulances, for chronically ill patients.

  • Germany

    All drugs, both patented and generic, are placed into groups with a reference price serving as a maximum level for reimbursement, unless they can demonstrate added medical benefit. Drug companies are required to produce scientific dossiers for all new drugs demonstrating added medical benefit, which is then evaluated by Institute for Quality and Efficiency (IQWiG), followed by a Federal Joint Committee decision within a six-month period. For drugs with added benefit, the Federal Association of Sickness Funds negotiates a rebate on the manufacturer’s price that is applied to all patients. In addition, rebates are negotiated between individual sickness funds and pharmaceutical manufacturers to lower prices below the reference price.

    Recently, reliance on overall budgets for ambulatory physicians and hospitals and on collective regional prescription caps for physicians has been replaced by an emphasis on quality and efficiency. The Hospital Care Structure Reform Act aims not only to link hospital payments to good service quality, but also to reduce payments in the case of “low value.”

    To extend competition, some purchasing powers have been handed over to the sickness funds, e.g., to contract providers selectively within an integrated care contract or to negotiate rebates with pharmaceutical companies.

  • India

    There are no comprehensive policies to hold down costs. Most cost-containment strategies are limited to cost-sharing and use of generic drugs. There is limited evidence with respect to use of cost-effectiveness assessments, monitoring for financial performance, improvement in operational efficiency, and health technology assessments.

    As the public health care system is financed through taxes, costs are contained in the first instance by allocations made to the health sector, which currently amount to less than 2 percent of GDP. Most government health facilities have to operate within the yearly allocated budget. Where there are public–private partnerships, government negotiates prices with private providers and reimburses accordingly.

  • Israel

    Israel is one of the most successful high-income countries in containing costs, with health expenditures remaining below 8 percent of GDP. Strategies include:

    • Channeling the bulk of funding through a single, tightly controlled, government source
    • Maintaining tight controls on key supply factors, such as hospital beds and expensive medical equipment
    • Requiring the health plans—which function as the building blocks of the health system—to provide care competitively, within budgets that are largely determined prospectively
    • Maintaining a well-developed system of community-based services, which reduces reliance on high-cost hospital care
    • Using electronic health records effectively, particularly in the community
    • Purchasing pharmaceuticals in bulk and relying heavily on generics
    • Setting maximum hospital reimbursement rates (government), negotiating discounts (health plans), and instituting hospital global revenue caps
    • Explicitly prioritizing public funding for new technologies included in the NHI benefits package
    • Aligning organizational and financial incentives between clinicians and the hospitals or health plans for whom they work (see below).

    Although clinicians are rarely given explicit financial incentives to contain costs, reliance on salary and capitation (rather than fee-for-service) may reduce incentives to over-treat. Moreover, the health plans have various internal processes to discourage care that provides poor value.

    Of recent concern to some experts, however, is the recent growth of private medical care and private financing, which is seen as potentially jeopardizing Israel’s success in containing cost growth.

  • Italy

    Containing health costs is a core concern of central government, as Italy’s public debt is among the highest in industrialized nations. Fiscal capacity varies greatly across regions. To meet cost containment objectives, the central government can impose recovery plans on regions with health care expenditure deficits. These identify tools and measures needed to achieve economic balance: revision of hospital and diagnostic fees, reduction of the number of beds, increased copayments for pharmaceuticals, and reduction of human resources through limited turnover.

    The Agency for Regional Health Services, in collaboration with the Ministry of Health, has authority to conduct health technology assessments and implement its findings at the regional level, but these are not yet formalized or undertaken systematically. Few regional health technology assessment agencies currently exist, and their primary function is to evaluate individual technologies. Assessments are not mandatory for new or referred procedures and devices. However, reference prices for medical devices and pharmaceuticals are set according to cost-effectiveness studies carried out by the National Committee for Medical Devices and the National Drugs Agency. Furthermore, the National Pharmaceutical Formulary bases coverage decisions in part on clinical effectiveness and cost-effectiveness. Prices for reimbursable drugs are set in negotiations between government and the manufacturer according to the following criteria: cost-effectiveness where no effective alternative therapies exist; comparison of prices of alternative therapies for the same condition; costs per day compared with those of products of the same effectiveness; financial impact on the health system; estimated market share of the new drug; and average prices and consumption data from other European countries. Prices for nonreimbursable drugs are set by the market.

  • Japan

    Price regulation for all services under the public health insurance system (PHIS) is a critical cost-containment mechanism. The fee schedule is revised every two years by the government, following informal stakeholder negotiations, and is based on the estimated overall rate of change in public health care expenditures and expenditures in different health care sectors.

    For medical, dental, and pharmacy services, the Central Social Insurance Medical Council revises fees on an item-by-item basis in order to meet overall spending targets set by the cabinet. Highly profitable categories see larger reductions. The revisions of prices of pharmaceuticals and devices are determined based on a market survey of actual current prices (which are often less than the listed prices). Drug prices can be revised downward for new drugs selling in greater volume than expected and for brand-name drugs when generic equivalents hit the market. Prices of medical devices in other countries are also considered in the revision.

    Negotiations between stakeholders take place only for the purpose of revising the fee schedule and the rule for deciding pharmaceutical prices. Whether cost-sharing and the existing competition between providers contain costs is unclear.

    The number of hospital beds is regulated by prefectures in accordance with national guidelines. The national medical student capacity, which is increasing since 2007 owing to physician shortages, is also regulated by the government.

    The government’s Cost-Containment Plan for Health Care is intended to promote healthy behavior, shorten hospital stays through care coordination and home care development, and increase generic substitution. Each prefecture makes cost-control plans in accordance with the plan. Both financial incentives in the fee schedule and other incentives, including education and training, are used. Peer review committees in each prefecture also monitor claims and may deny payment for services deemed inappropriate.

    Currently, some pharmaceuticals whose medical effectiveness is considered uncertain are not covered by the PHIS. A trial cost-effectiveness evaluation for coverage of selected pharmaceuticals and medical devices is scheduled for fiscal year 2016.

  • The Netherlands

    The main approach to controlling costs relies on market forces while regulating competition and improving efficiency of care. In addition, provider payment reforms, including a shift from a budget-oriented reimbursement system to a performance- and outcome-driven approach, have been implemented.

    Cost containment was one of the most significant subjects of public debate surrounding the 2012 elections. The most recent figures indicate that expenditure growth has fallen significantly, to 1.8 percent in 2014.

    The pharmaceutical sector is generally considered to have contributed significantly to the decrease in spending growth. Average prices for prescription drugs declined in 2014, although less than in previous years. Reimbursement caps for the lowest-price generic have contributed to the decrease in average price. Reimbursement for expensive drugs has to be negotiated between hospital and insurer. There is some concern that this and other factors may limit access to expensive drugs in the near future.

    The annual deductible, which accounts for the majority of patient cost-sharing, more than doubled between 2008 and 2015, from EUR170 (USD206) to EUR375 (USD454). There are some worries that this increase has led to greater numbers of people abstaining from or postponing needed medical care.

    Health technology assessment is gaining in importance and is used mainly for decisions concerning the benefit package and the appropriate use of medical devices.

    In 2013, an agreement signed by the Minister of Health, all health care providers, and insurers set a voluntary ceiling for the annual growth of spending on hospital and mental care. When overall costs exceed that limit, the government has the ability to control spending via generic budget cuts. The agreement included an extra 1 percent spending growth allowance for primary care practices in 2014 and 1.5 percent in 2015–17, provided they demonstrate that their services are a substitute for hospital care.

    Cost containment is most severe in long-term care. People with lower care needs are no longer entitled to residential care. In addition, the devolution of services to the municipalities was accompanied by substantial cuts to the available budgets (on average almost 10%).

  • New Zealand

    The financial sustainability of publicly funded health care is a top government priority. To support this goal, government has implemented a range of measures, including four-year planning to align expenditure with priorities over a longer period and improving regional collaboration to drive efficiencies. All new proposals must be integral to a four-year plan and demonstrate their fit with the strategic direction of the health sector.

    Cost control in district health boards (DHBs) has been closely monitored by the Ministry of Health, with a significant reduction in deficits over the last five years, from NZD154.8 million (USD105.4 million) in 2008–2009 to NZD7.4 million (USD5.0 million) in 2013–2014. These reductions are achieved largely through efficiency gains and cuts in spending on staff, services, and equipment. As public hospitals are essentially free of charge, there is no mechanism to shift costs to patients. There have been experiments with shared-savings arrangements in the past, with contracted providers such as GP networks.

    The National Health Committee prioritizes health technologies and provides advice as to which technologies no longer offer value for money, increasingly using comparative-effectiveness research in evaluation.

    The Pharmaceutical Management Agency uses mechanisms such as reference pricing and tendering to set prices for publicly subsidized drugs dispensed through community pharmacies and hospitals. If patients prefer unsubsidized medicines (and if there are no clinical indications that these would be more effective), they pay the full cost. Such strategies have helped to drive down pharmaceutical costs and to keep drug expenditure per capita the fourth-lowest in the OECD in 2012.

  • Norway

    Central government sets an overall health budget annually, and municipalities and regional health care authorities (RHAs) are responsible for maintaining their budgets. The drug pricing scheme aims to encourage use of generic drugs. Cost-effectiveness is a criterion to get on the “blue list” of drugs eligible for reimbursement, and there is a defined maximum price for drugs, linked to reference prices set at the average of the three lowest market prices for the drug in a defined group of Scandinavian and Western European countries. The Drug Procurement Cooperation (LIS) has been effective in negotiating drug purchases and delivery jointly for the four RHAs.

    Costs are contained through GP gatekeeping for specialized services. There is very little competition regarding pricing within the health services. A minute proportion of specialized care is offered to the private sector by RHAs and contracted through tenders, for which price is one of several criteria.

    The National System for the Introduction of New Health Technologies, established in 2014, bases its decisions on whether to approve new, costly drugs or treatment mainly on Health Technology Assessments, which address cost-effectiveness.

    Norway has a low number of hospital beds (four per 1,000 inhabitants in 2012) compared with the OECD-Europe mean of five. The low number is part of a policy to drive services toward outpatient and daycare settings, and to make municipalities accountable for patients not needing specialized hospital care. There is an ongoing debate about overdiagnosing and use of procedures that are not evidence-based. Clinical guidelines and a published atlas of variation in frequency of some daytime surgical procedures ( are the only measures taken to date to reduce “low value” care. Although the Council on Priorities in Health Care has debated, for instance, levels of end-of-life care and use of intensive care beds, no focused initiatives have resulted from the debates.

  • Singapore

    Singapore spends just 4.7 percent of its GDP on health care. Cost is controlled in a number of ways, perhaps foremost by the manner in which the government both fosters and controls competition—intervening when the market fails to keep costs down. Public and private hospitals exist side by side, with the public sector having the advantage of patient incentives and subsidies. Because it regulates prices for public hospital services and regulates the number of public hospitals and beds, the government is able to shape the marketplace. Within this environment, the private sector must be careful not to price itself out of the market.

    At the same time, the government sets subsidy and cost-recovery targets for each hospital ward class, thereby indirectly keeping public sector hospitals from producing excess profits. Hospitals are also given annual budgets for patient subsidies, so they know in advance the levels of reimbursement they will receive for patient care. Within their budgets, hospitals are required to break even.

    To keep demand for services in check, the government possesses numerous tools, including copayments, deductibles, and restrictions on the use of Medisave and MediShield for consultations, treatments, and procedures. These controls discourage unnecessary doctor visits, tests, and treatments, resulting in more careful use of health system resources.

    Price transparency: Another factor in controlling costs is price and outcome transparency. On its website, the Ministry of Health makes available hospital bills for common illnesses, treatments, and ward classes. Patients can look up costs for specific surgeries and tests, the number of cases treated in each hospital, and more. Data for public sector hospitals are complete; since private hospitals supply data voluntarily, the information may not offer the same level of detail. Armed with pricing information, consumers are able to shop better for the services they require.

    Pooling of funds and purchasing: The Group Purchasing Office consolidates drug purchases at the national level. One goal of this system is to keep drug prices affordable by containing the costs of pharmaceutical- related expenditure. The Group Purchasing Office also purchases medical supplies, equipment, and IT services for the health care system.

  • Sweden

    County councils and municipalities are required by law to set and balance annual budgets for their activities. For prescription drugs, the central government and the county councils form agreements, lasting a period of years, on the levels of subsidy paid by the government to the councils. The Dental and Pharmaceutical Benefits Agency also employs value-based pricing for prescription drugs, determining reimbursement based on an assessment of health needs and cost-effectiveness. In some county councils, there are also local models for value-based pricing for specialized care such as knee replacements.

    Because county councils and municipalities own or finance most health care providers, they are able to undertake a variety of cost-control measures. For example, contracts between county councils and private specialists are usually based on a tendering process in which costs constitute one variable used to evaluate different providers. The financing of health services through global budgets, volume caps, capitation formulas, and contracts, as well as salary-based pay for staff, also contributes to cost control, as providers retain responsibility for meeting costs with funds received through those prospective payment mechanisms. In several counties, providers are also financially responsible for prescription costs.

  • Switzerland

    Switzerland’s health care costs are among the highest in the world. “Regulated competition” among nonprofit health insurers and among service providers is aimed at containing costs and guaranteeing high-quality health care, and establishing solidarity among the insured. While most of its objectives are considered successfully achieved, academic analyses and public perception have been critical of competition’s ability to control health care costs. A global budget, however, has never been regarded as a possible remedy for this problem. Failures are ascribed largely to inadequate risk equalization, the dual funding of hospitals, and pressure on insurers to contract with all certified providers. The costs of providing mandatory benefits in the health system could be reduced by up to 20 percent (FDHA, 2013).

    An overview of possible cost-reducing measures—in coordination of care, compensating systems, and highly specialized medicine—is part of the Health2020 agenda. The agenda outlines a need for increasing flat-rate remuneration mechanisms and revising existing fee schedules to limit incentives for service providers. Also mentioned is the need for greater concentration in sites of highly specialized medicine to eliminate inefficiency and duplication in infrastructure systems and to increase the quality of health care provision. SwissDRG AG was introduced to contain hospital costs. Inpatient capacity is subject to cantonal planning requirements, and there is a “necessity clause for outpatient providers.” See also the section on cost-sharing for patient cost-sharing mechanisms.

    To control pharmaceutical costs, coverage decisions on all new medicines are subject to evaluation of their effectiveness (by Swissmedic) and cost (by the Federal Office of Public Health [FOPH]). Efforts are being made to reassess more frequently the prices of older drugs. Depending on national market volume, generics must be sold for 20 to 50 percent less than the original brand. In addition to the aforementioned 20 percent coinsurance for brand-name drugs, pharmacists are paid flat amounts for prescriptions, so they have no financial incentive to dispense more expensive drugs.

  • United States

    Annual per capita health expenditures in the United States are the highest in the world ($9,086 in 2013), despite a recent slowdown in spending. Payers have attempted to control cost growth through a combination of selective provider contracting, price negotiations and controls, utilization control practices, risk-sharing payment methods, and managed care. Recently, both public and private payers have focused more attention on value-based purchasing and other models that reward effective and efficient health care delivery. A movement toward favoring generic drugs over brand-name drugs, meanwhile, has led to a slowdown in pharmaceutical spending in recent years, although growth rebounded in 2014. Another growing trend is the increase in private insurance plans with high deductibles.

    A number of reforms included in the Affordable Care Act attempt to develop payment methods in the Medicare and Medicaid programs that reward high-quality, efficient care. Some of these use pay-for-performance mechanisms, whereas others rely on bundled payments, shared savings, or global budgets to incentivize integration and coordination among health care providers.

    Despite a recent slowdown in health care spending, the latest data, through August 2015, show that spending grew 5.7 percent in the past year.