Spending for Q2 on the High Side Again—How Much Longer Will it Last?

Growth in drug spending declines, while health care prices notch up slightly.
Staff portrait of Kathy Hempstead

Katherine Hempstead, PhD, MA, director and senior program officer, leads RWJF's work on health insurance coverage.

This tenth 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. This expanded report includes the recently released QSS data.

Some of the major takeaways include:

Overall spending is still on the high side at 6.6 percent, on a pace similar to the first quarter of the year. This suggests an estimated growth rate of 6.6 percent for the first half of 2015, and furthermore raises the distinct possibility that the growth rate of 5.3 percent projected by the Centers for Medicare & Medicaid Services (CMS) for the whole year may well be eclipsed. In fact, it would require a very quiet second half of the year to stay in the zone of that projection.

What accounts for this increase in health spending? 
Altarum provides a helpful tour through the list of responsible parties.  As has been the case for the last year, utilization is a major factor. This stands to reason, due to the large expansion of health insurance coverage documented once again in the recent release of the American Community Survey and Current Population Survey Annual Social and Economic Supplement data by the Census Bureau. While uninsured people do consume health care services, those with insurance consume more, so it is inevitable that aggregate utilization will rise as coverage expands unless utilization patterns change.  And hospital readmission penalties and other “volume to value” efforts notwithstanding, there has not been a change in utilization that could offset the impact of a coverage expansion of this magnitude.

What we would expect, however, is that as the rate of coverage expansion inevitably slows, the growth in utilization will slow as well, and the rate of increase in health care spending should level off, unless some other cost driver interferes. One potential driver would be an increase in health care prices, but Altarum has consistently demonstrated that recently, increases in spending on health care services have been driven far more by utilization than prices. This is shown powerfully in Figure 5. While there is a slight indication that the decline in health care prices might be levelling off, as seen in Figure 6, we still see price increases south of one percent in the first half of 2015.

While price growth remains reasonable, there is plenty of evidence that the health sector is ramping up to meet new demand. Health care job growth has accelerated sharply over the last three or four quarters and this pace continues in Q2 2015 where the year-over-year growth rate was upwards of 2.5 percent. And this increase in jobs, not surprisingly, is greater in states which experienced more coverage expansion, as seen in Figure: Increase in Health Job Growth Rate versus Gain in Coverage for 10 Largest States.

The productivity of labor in health care appears to be increasing as shown in Figures 9 and 10, as the use of technology and other inputs increases. These changes may be why price growth has stayed reasonable, as providers are finding ways to minimize growth in unit costs. Another way to think about this is that the increase in health jobs may understate the increase in supply capacity.

Turning finally to prescription drugs, this category of health spending has been a rather infamous cost driver of late.  Here we see some levelling off, as the huge shock of specialty drug treatment for Hepatitis C, which led to a 12.5 percent increase in drug spending for 2014, has been somewhat absorbed. A comparatively tame increase of 9.7 percent for Q2 2015 nevertheless suggests that increased spending on drugs will eclipse CMS projections of 7.6 percent for the year. But with new specialty drugs just around the corner, along with renewed interest in cost containment measures, the future for this component of health care spending is the most uncertain.

The Altarum report concludes by observing that the “resolution of temporary cost drivers” is essential in order to stay within the more moderate regions of health care spending growth that we have enjoyed over the past several years. The first of these drivers is utilization, which has risen as we on-board the newly covered, but just as inevitably should level off as coverage expansion slows. The second temporary driver is the less predictable prescription drug spending, which is a more complicated mix of issues involving the development of new products and pricing. While prices have lately not made the short list of cost drivers, going forward it is essential that we continue to focus on fostering competition in health care markets, so that we promote continued productivity improvements and minimize the exercise of market power.