This eleventh monthly trend report produced by the Altarum Center for Sustainable Health Spending and funded by the Robert Wood Johnson Foundation builds upon data from their ongoing monthly Health Sector Economic Indicators and provides further analysis of the latest findings from the Census Bureau’s Quarterly Services Survey.
Health spending grew extremely slowly (at 4% per year) in the recent past (2009-2013), but the pace accelerated starting in 2014, reaching a height of 6.7 percent in Q1 2015. The recent rise has been attributed to two primary factors: coverage expansion and increased spending on pharmaceuticals. The coverage part of this spending increase stems from the policies of the Affordable Care Act while the pharmaceutical component reflects both price increases on existing drugs as well as widespread utilization of new (and expensive) specialty products, most notably Hepatitis C therapies.
It appears that both drivers may have cooled off, as year-over-year health spending growth fell to 6.1 percent in Q2, and preliminary data shows it now hovers below 6 percent (5.8%) in the first two months of Q3. The impact of coverage expansion on health care spending growth was expected to level off as the pace of expansion slowed. This essentially appears to be happening, and in the absence of Medicaid expansion in the remaining big states, additions to the ranks of the insured are not expected to increase dramatically in the short term. The recent increase in pharmaceutical spending has slowed as well, in part because the cohort of patients with Hepatitis C has largely begun treatment.
Of the two drivers, pharmaceutical spending growth is harder to predict, due both to the pipeline which can create expensive new products (largely specialty) as well as potential pricing issues related to all products. As a public issue, prescription drug costs have ended up in the crosshairs of public debate, and payers may be feeling increasingly emboldened of late. But while a bit of “self-regulation” may occur due to extensive negative press, aggressive pricing strategies persist, as evidenced by the recent disclosure of Valeant’s specialty pharmacy relationships. Prescription drug prices have risen quite a bit more rapidly than health care service prices of late, 5.2 percent versus .6 percent year-over-year in Q2, as shown in Figure 1: Health Services and Prescription Drug Price Growth.
But anything would suffer in comparison to health care service prices, which have grown very slowly in recent quarters. While utilization of health care services has increased due to coverage expansion, the price of health care services has hardly increased at all. While we see the health care work force continue to grow at a healthy clip to meet increased demand as shown in Figure 2: Growth in Health Services Spending and Jobs, the growth in supply of services is greater, and labor productivity is by all appearances increasing. Providers are using labor in new ways, and there is much evidence that they are increasingly making efforts to deliver services more efficiently by standardizing their process, utilizing cost-based accounting and better managing their supply chain. Pressure to be more efficient is coming at providers from all directions—CMS, payers, and increasingly, consumers, who are the “deciders” for a growing share of their revenue. Recent studies of commercially insured populations (Rand Health/Carnegie Mellon and National Bureau of Economic Research) have provided important information about the effect of high-deductible plans: utilization declined, and so did spending on health care. Lately, providers have been managing to increase supply while keeping price growth relatively low. An important question is how long this will continue, particularly in the face of a potential slowdown in volume growth in addition to the substantial consolidation which has taken place along the way.