Beyond the Coverage Bump: Is Spending Growth Returning to Pre-ACA Levels?

We may finally be getting past the increase in health care spending growth brought about by coverage expansion. As seen in the most recent monthly health care spending trend report from the Altarum Institute, health care spending growth was estimated at just under 4 percent for the second quarter of 2017, a level not seen since 2014. This results in an estimate of 4.4 percent growth for the first half of 2017, a notch lower than the 4.6 percent growth seen for all of 2016.  Among the subcategories of spending, health care services spending growth in particular was low, growing by only 3.5 percent in the second quarter of 2017. Hospital spending growth in Q2 increased by an almost unbelievably slight 1.3 percent.

Health Care Prices are High, But Growing Slowly

While the overall level of spending growth is returning to pre-Affordable Care Act (ACA) levels, the spending drivers are quite different. Between 2009 and 2013, for example, growth in spending on health care services averaged 4.2 percent, yet this spending growth was roughly equally driven by increases in price and growth in utilization. Since the ACA, prices have grown very little, and utilization increases have powered spending growth. Since the ACA, price growth for health care services has been low by almost any standard. During the first half of 2017, health care price growth averaged 1.8 percent, the same as economy-wide inflation. Growth of health care service prices was even lower, only 1.4 percent in 2017.

Trend in Declining Price Growth Pre-Dates ACA

Yet this general downward trend in health care prices has been developing for a number of years, and since 2011 health care prices have grown at or below the rate of economy wide inflation. This has been true for both hospital and physician prices which had been growing at a declining rate since 2006. Since the coverage expansion, this downward trend in price growth has persisted, with physician prices growing even more slowly.

Ambulatory Care Utilization Has Powered Recent Spending Growth

Spending growth associated with the ACA has been driven by utilization rather than prices, and by utilization of physicians rather than hospitals. Growth in spending on physicians exceeds that on hospitals, but physician price growth has been even lower, suggesting that increased utilization of outpatient care has been a major spending driver. During the years before the ACA, hospital spending growth exceeded physician spending growth by a considerable extent (5.6% versus 4.1%). However, coverage expansion has reversed this trend, and led to faster physician spending growth as compared with hospitals (5.5% versus 4.8%).

Job Growth Reflects Transition to Ambulatory Care

This trajectory can be seen in the kinds of health care jobs that have been created. Job growth has been quite volatile, and ranged, this year alone, from a low of 15,000 in March to 41,000 in July. In August, there was a net increase of 20,000 health care jobs. Most job growth, as well as most variation in job growth, has been in the ambulatory sector, where net job growth has ranged from 8,000 in March to 30,000 in July. As further evidence of the growth in lower cost services, we have seen evidence that labor productivity in health care has increased, as measured by the ratio of services per job, which has increased markedly from 2013. The index of services per job has been increasing slowly from 2005, but spiked beginning in 2014 from 1.02 to 1.08. Recently, this measure has levelled off, which could suggest an end to productivity growth and may also signal some signs of excess capacity.

What Comes Next?

The expectation has been that spending and job growth would rise during coverage expansion, then return to pre-expansion levels. The increase in spending growth didn’t start right away, but the bulk occurred during 2014 and 2015. Coverage expansion affects most components of health care spending—the utilization of services, prescription drug use, and the net cost of insurance. The peak in spending growth occurred in Q1 2015, when health care spending growth topped out at 7.1 percent. The growth rate for services spending was 5.8 percent in 2015—far above the average of 4.3 percent from the period 2010-2012. Growth started to level off in 2016, and by later in the year the slowdown was evident. Spending on services slowed to 4.9 percent, dropping further in the first half of 2017 to 4.3 percent. Now we are once again approaching growth rates in the neighborhood of those seen in 2010-2012—before the coverage expansion took place. Job growth in health care jumped from 1.5 percent in 2013 to 2.7 percent in Q3 2015, and has now returned to a still high but somewhat less elevated 2.1 percent.

Excess Capacity?

Looking at the past decade, we see both a longer term downward trend in services price growth and a recent and sizable coverage expansion. Much of the volume-driven growth has been achieved by continuing and accelerating ongoing trends—substituting cheaper health care professionals and settings for more expensive ones. Many were surprised at how easily the delivery system accommodated the increase in demand. Now that demand has stopped growing so quickly, a question will be whether the sector has overbuilt, and if so where. Hospitals are clearly still downshifting—consolidating, outsourcing, buying more profitable parts of the delivery system, and sometimes closing or laying off staff. The recent Community Health System sell-off is a telling episode to watch. But this process has been going on for some time. The urgent care sector is another one to watch—with more than 7,500 stores in 2017, this segment has grown quickly to become a $25 billion dollar industry. But the space is already considered overbuilt by some, as new clinics face pressure from expanding clinics in existing stores and the development of telemedicine applications that can increasingly deliver health care in home settings.

It remains to be seen whether there will need to be some recalibration on the ambulatory side as growth in demand levels off, financial pressures potentially intensify, and the delivery system continues to evolve.