National Health Spending: A Return To The ‘Old Normal?’

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Editor’s note: For more discussion of the latest national health expenditure numbers, see Sherry Glied’s Health Affairs Blog post.

The year 2015 may be the year that we said goodbye to what some have called the “new normal” of health care spending. It’s becoming ever more clear that the unexpected and remarkably consistent slowdown in health care spending that began in the early 2000s is over. According to updated data from the economists and statisticians at the Centers for Medicare and Medicaid Services, 2015’s health spending hit $3.2 trillion, growing at 5.8 percent from 2014. That edges us ever closer to the growth rate just before the Great Recession, when health spending grew around 6.5 percent.

But as we return to the “old normal” of health care cost growth, our health care system looks radically different under the hood. The close of this episode has important lessons for policymakers, the incoming Trump administration, and health policy analysts.

Where Do We Stand?

At $3.2 trillion, health care now consumes 17.8 percent of GDP — an unfortunate new record on the heels of the slowest health care spending growth we’ve ever seen. While the magnitude of this slowdown has been widely discussed, a chart from the new report illustrates it particularly well.

Exhibit 1

Source: National Health Spending: Faster Growth In 2015 As Coverage Expands And Utilization Increases by Anne B. Martin, Micah Hartman, Benjamin Washington, Aaron Catlin, and the National Health Expenditure Accounts Team, Health Affairs, January 2017.

After hitting near double digit growth in 2002, national health spending growth plummeted to a low of 2.9 percent in 2013. Why this slowdown happened is still largely an open question. Researchers from Harvard and Dartmouth have argued that high-deductible plans, state-level efforts on Medicaid, and reduced use of new technology account for the slowdown. More recent analysis using a rich dataset of private health insurance claims assigns 70 percent of the slowdown to economic factors. We shouldn’t hope for some grand theory to answer it all, but this will likely be a well-studied topic in the coming years. For now, though, we can say that the slowdown is mostly done.

Indeed, since 2013, for two years straight, total spending grew by over 5 percent annually. It’s unlikely that these are just flukes or one-off jumps due to increased insurance coverage under the Affordable Care Act (ACA). More recent (though more volatile) estimates from the Altarum Institute suggest that this trend is continuing through 2016. And with anemic GDP growth for 2015 (and better but still weak growth in 2016), this is causing health spending to continue to increase as a share of the economy.

Aggregates, of course, are important. Digging under the hood is at least equally so. Without exploring the components of the health care economy, we risk missing valuable insights. And one insight in particular from these new data is especially worth underscoring.

Spending Growth Increasing, But Price Growth Remains Low

Though the health care spending slowdown may be done, price growth remains low. Indeed, the biggest driver of per capita health care spending in the past two years has been so-called “residual use and intensity” (a fancy term for utilization). In 2015, utilization accounted for 3.2 percent of the 5 percent growth in per capita health care spending. Prices, on the other hand, accounted for 1.2 percentage points of that growth.

Exhibit 2

ha_exhibits_35-12_martin-02

Source: National Health Spending: Faster Growth In 2015 As Coverage Expands And Utilization Increases by Anne B. Martin, Micah Hartman, Benjamin Washington, Aaron Catlin, and the National Health Expenditure Accounts Team, Health Affairs, January 2017.

The growth in utilization is almost undoubtedly (at least in part) due to coverage expansions under the ACA. It’s possible that after a short bump, that utilization will recede (experts call this “pent-up demand”). Alternatively, if the health care needs of the newly insured population are more consistent, this increase will remain.

But what about those low prices? Simply put, we don’t really know. In some areas, price growth is actually fairly strong — in prescription drugs, for instance. Overall, however, it appears that a slowdown in economy-wide inflation is the main explanation here. And to the extent that this is true, it shouldn’t necessarily be cause for celebration. A little bit of inflation makes for a healthy economy.

Exhibit 3

feyman-exhibit-3

Source: US. Bureau of Economic Analysis, Personal consumption expenditures: Services: Health care (chain-type price index) [DHLCRG3Q086SBEA], retrieved from FRED, Federal Reserve Bank of St. Louis, December 5, 2016.

It isn’t clear whether the move from price-induced spending growth to utilization-induced growth will continue. If it does, that may represent an important shift in the fundamentals of our health care system.

Where Do We Go From Here?

As might be expected, there are important lessons to be learned from this report.

Obamacare

For starters, the CMS researchers make one thing clear: The Affordable Care Act has done little to nothing on health care costs. Exhibit 1 illustrates this point well.

Of course, this shouldn’t be viewed as a bug. The ACA’s primary features focused on expanding insurance coverage. The only real attempts at cost-control came within Medicare and through the Cadillac Tax (which hasn’t gone into effect yet). Moreover, given that the slowdown in health care cost growth began prior to the ACA, it simply wouldn’t make sense to give the law much if any credit for the slowdown.

That being said, the ACA has helped when it comes to Medicare. CMS’ researchers note, importantly, that the continued slowdown in Medicare’s hospital spending growth has been driven by reduced readmission rates (incentivized by the ACA’s penalties) and a reduction in disproportionate share hospital payments. The importance of these schemes shouldn’t be undersold, as they are forcing substantive changes in the country’s hospital sector.

However, reductions in Medicare’s readmission rates may have hit a plateau. If this is true, we shouldn’t expect much in the way of continued savings from these changes. Yet this also doesn’t justify conservatives’ focus on “repeal-and-replace” of the ACA above all else. There are things the ACA has done well and things it’s done poorly. Throwing out the baby with the bathwater is simply bad policy.

Drug Spending

The health care issue du jour has arguably been pharmaceutical spending. The last two years, which have seen a combined growth of over 20 percent in drug spending, have been particularly vitriolic. Here, as with the ACA, the lesson might be that policymakers need a scalpel rather than a cudgel.

Much of the growth in spending has likely come from new, curative hepatitis C therapies (as the report authors note). These are expensive upfront; MACPAC has noted that these new treatments accounted for 20 percent of the increase in gross Medicaid spending from 2013 to 2014. In addition, given the large patient population, they are in high demand. But this isn’t something to be “fixed.” Not only are these treatments highly cost-effective, they are also likely to reduce health care spending significantly over the next 20 years through fewer new infections and fewer liver transplants. Clamping down on prices for curative therapies would send the wrong signal to drug developers.

This doesn’t mean that drug pricing doesn’t warrant policy responses. In fact, there are many ideas to choose from. But the best approaches are targeted and don’t treat all drug spending as a silo.

The ‘New Old Normal’

Perhaps the biggest issue—which encompasses all the of the above—for policymakers and analysts to contend with going forward will be to determine with much more clarity what we want the health care system to look like 10 years from now. The health care slowdown might best be called a happy accident. We got lucky. But accidents make for poor policy.

Important questions abound, but here’s a small sampling of nationally important questions policymakers and analysts need to seriously consider:

  • What role will Medicare Advantage (private plans under the Medicare program) play going forward?
  • What should the benefit structure for traditional Medicare look like?
  • Should the biggest insurers be regulated like utilities?
  • How much flexibility should states receive in structuring their Medicaid programs?
  • What role should the federal government play in regulating pharmaceutical prices?

That’s just a snippet, but these are all pressing issues that can’t be put off indefinitely. And importantly, these and other questions will require bipartisan agreement. After all, the ACA era should make clear that passing health policy along partisan lines creates a slew of new problems.

Of course planning for 10, or even five years down the line, will often fail. But having clear goals at least helps to measure success and failure. And when planning succeeds, the payoff could be huge: perhaps we’ll end up with a health care system that at least looks intentional.

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