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      Cost Trends - Looking Ahead

      Brief Jan-15-2019 | 4-min read
      1. Insights
      2. Our Research
      3. Cost Trends - Looking Ahead
      Staff portrait of Katherine Hempstead

      Katherine Hempstead, PhD, MA, senior policy adviser, leads RWJF's work on health insurance coverage.

      The latest health care spending report from the Altarum Institute shows a continuation of the relatively moderate trends in spending growth, and highlights some key revisions in recent trend data. Reflecting recent CMS releases, the rate of spending growth in 2016 was revised upward, so that it is now a little higher relative to 2017, creating a two year step-down from the peak year of 2015. The downwardly revised spending growth rate for 2017 is now 3.9 percent, the second lowest since the all-time low of 3.0 percent in 2013. The revised figure for 2016, on the other hand, is a notably higher 4.8 percent. The first three quarters of 2018 suggest that spending growth for that year will fall in between the two years, a bit higher than 2017, but likely not at the level of 2016.

      For several years before the coverage expansion in 2014, the rate of health care spending growth bobbled around the 4.0 percent range. The ACA saw a rise in the growth rate fueled by increased utilization, as millions gained coverage. Spending growth peaked at 5.8 percent in 2015, and has declined in the two subsequent years. For spending on health care services, the largest and most stable component of health care spending, the 2018 growth rate for the first three quarters is 4.6 percent, closer to the revised rate of 4.3 percent in 2017 than to the 5.3 percent rate for 2016. It has often been speculated that the low growth in health care spending observed pre-ACA reflected tailwinds from the recession. However, the revised 2017 spending estimate suggests that moderate health care spending growth can co-exist with a strong economy and tight labor market. It is clearly too soon to know what the 2018 data will show, and it remains to be seen whether we are approaching a post-ACA equilibrium where spending growth may once again settle in the 4.0 percent range.

      Striking an optimistic tone, the report concludes: "...there is reason to be more hopeful about our ability to restrain the growth in national health spending." Without a doubt these hopes are widely shared, as seen by the prominence of health care as a voter issue. In a recent poll, 92 percent of all respondents identified reducing prescription drug costs and 88 percent cited “lowering the cost of health care” as top health priorities.

      With per enrollee costs growing more slowly in Medicare and Medicaid, addressing high and rising provider rates in the commercial market has been a common theme in many current efforts to control health care costs. The growing popularity of public options such as Medicare or Medicaid buy-ins appeal to many state and federal policymakers because they offer the potential to increase the share of the population under lower contracted rates. At least in a conceptual sense, these plans appeal to many voters, with a majority of recently surveyed Republicans and Democrats in favor of a voluntary Medicare buy-in option for those under 65.    

      Employers are also taking steps to restrain provider prices. More states may choose to flex their muscles in negotiating rates in their state employee health plans, following the lead of North Carolina, which recently announced plans to base payments to hospitals on Medicare rates, a strategy which would save the state an estimated $300 million. Some large private employers are finding new ways to put pressure on high-priced providers, as seen in the ambitious efforts of the Employer’s Forum of Indiana to publicly share information on negotiated rates.

      The issue of high and rising commercial prices is increasingly well publicized and better understood, thanks to analyses of claims data such as that maintained by the Health Care Cost Institute (HCCI). There is growing policymaker interest in finding new strategies to combat provider market power.  The California Attorney General’s recent anti-trust action against contract practices used by the Sutter health system is one such example. A new federal report on promoting health care competition drew heavily on themes from an earlier Brookings white paper, which proposed strategies such as site neutral payment and removing anti-competitive clauses from contracts. A recent article on these contracts resulted in an inquiry from Senator Chuck Grassley to the Federal Trade Commission. Reflecting this growing momentum, a number of states, following the lead of Massachusetts, are developing comprehensive approaches to health care cost containment, including establishing benchmarks for health care spending growth.

      Yet while there may be some momentum, there are other reasons that enthusiasm should be tempered. Importantly, the most recent National Health Expenditure projections from CMS predict an annual spending growth rate of 5.5 percent between 2017 and 2026, driven by “fundamental economic and demographic factors” such as changes in income, rising prices, and population aging. Further, the most recent data from the Bureau of Labor Statistics show a net addition of 50,000 new health care jobs in December 2018, the highest monthly number since at least 1990. As Jonathan Skinner and Amitabh Chandra argue in JAMA, given the labor intensive nature of health care, it is hard not to see employment as a bellwether for spending trends. In other words, it is difficult to see how health care spending growth can slow if health care job growth does not.

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