The "Real Killer" Is Still Out There: Update on Health Care Spending

Staff portrait of Katherine Hempstead

Katherine Hempstead, PhD, MA, senior adviser to the executive vice president, leads RWJF's work on health insurance coverage.

The issue of health care spending has been lurking offstage through much of this year's reform debate. Critics and pundits from both sides of the aisle have frequently noted that the cost of health care is the overlooked "real" problem, and is not well addressed by either the friends or foes of the Affordable Care Act (ACA).

A typical story, a Portland Maine Press Herald editorial, observes that the ACA has not done enough to make health care affordable: "People cannot afford to buy insurance because we have not found a way to control the cost of the services that insurance pays for." Or as Warren Buffett has more colorfully observed in the New York Times, "Medical costs are the tapeworm of economic competitiveness." The distinction between affordability to individuals versus the affordability of health care spending to the nation is sometimes lost in the shuffle, but the general frustration with the cost of health care is palpable, and has prompted many to advocate for a single-payer solution.

In all the excitement over reform efforts, it has been hard to focus on actual trends in health care spending, but recent work by the Altarum Institute provides much needed perspective. From their latest trend report, as well as their recent annual symposium, come some timely evidence suggesting that, although health care spending growth is slowing of late, national health care spending is still unsustainable.

But first, the good news...

Slowth Breaks Out in Q2

Sub 5 percent health care spending growth always attracts attention these days and health care spending growth dropped to 4.5 percent in the second quarter of 2017, down from 5.2 percent in Q1 and all of 2016. One reason for this decline is the cessation of coverage expansion. In the current political climate, momentum toward further expansion is stalled, at least for now, and the Q1 2017 uninsurance rate may have increased slightly. Reflecting the trend toward less intensive settings, spending growth slowed the most (3.6%) in hospitals. This trend is also evident in health care job growth, which has slowed considerably in 2017.

Prices Are High, But Price Growth Has Stayed Low

While overall spending growth has declined, price growth has declined as well, to 1.6 percent in the second quarter, from 2.0 percent in the first quarter. This downturn was largely driven by a decline in prescription drug price growth, while prices for health care services changed very little. It is worth noting that, in fact, price growth in health care has been slow, at least by historical standards, for some time, but the trend has taken a while to unfold. For example, before 2010, health care prices were growing significantly faster than other prices, but since 2010, health care prices and economy-wide prices have grown at the same rate. So far in 2017, however, health care prices have been growing more slowly than economy-wide prices. This trend in price growth may reflect the ongoing downshift in the delivery system toward providing care in less intensive settings, and expanding scope of practice to make higher use of less well-paid providers, among other factors. This trend would be expected to slow growth in service costs, to the extent that unit costs are growing more slowly in health care as compared with other sectors.

On the other hand...

Health Care Cost Growth Is Still Not "Sustainable"

Presentations at Altarum’s annual symposium on health care spending served to remind us that we should derive little comfort from these small, recent slowdowns in spending growth. Health care spending is still growing considerably faster than the Gross Domestic Product (GDP) at a rate which is "unsustainable," in that it will severely impair our ability to pay for other important public and private priorities.

Price Growth Has Stayed Low, But Prices Are High

On a symposium panel that focused on key drivers of health care spending, analyses of both high negotiated commercial rates, as well as high prescription drug prices, were presented. Both focused on how our system facilitates aggressive pricing, and they provided smart policy suggestions that would require greater political will than is currently on display.

Increased Disease Prevalence Drives Spending

While much of the focus on drivers of health care spending relates to prices, an important presentation from Altarum's Charlie Roehrig noted the significant role played by increasing morbidity, particularly the prevalence of multiple chronic conditions. While arguing that we have made some progress in controlling costs of treatment, the increase in the prevalence of conditions for which individuals are treated, especially the more costly combinations of conditions, creates upward pressure on spending. Roehrig concluded with this somber observation, “Even if we can control treatment costs per unit of illness to the rate of inflation, spending will grow at GDP + 0.7 unless the shift into greater chronic condition multiples can be slowed. The aging population will make this more difficult.”

His remarks suggest that—difficult as it may be to control health care prices—controlling that alone will not be sufficient. Unless we improve population health, we may be on a crash course with a fiscally unpleasant future.