Health Care Costs: What Lies Ahead

Staff portrait of Kathy Hempstead

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

A report from the Altarum Institute Center for Sustainable Health Spending sheds some interesting light on what trends may be emerging in health care costs. The Health Sector Trend Report, a monthly series funded by the Robert Wood Johnson Foundation, made use of the December release of the Census Bureau’s Quarterly Services Survey to provide some early estimates of Q3 2015 spending.

The upshot is that overall spending is tracking a bit higher in 2015 as compared with 2014—approximately a percentage point higher at 6.3 percent for the first three quarters of 2015 as compared with the 5.3 percent growth rate for 2014 recently reported by the Centers for Medicare & Medicaid Services (CMS).

Should this surprise us? It should not when the time trend in coverage expansion is put in perspective. While coverage began increasing in 2014, growth accelerated through the end of the year and into 2015. With expanded coverage has come an increased use of services, an increase in the net cost of insurance, and consequently, an increase in the overall growth of health care spending.

Will this increased spending growth level off? To the extent that much of the recent growth in health care spending has been driven by coverage expansion, we may well be approaching our cruising altitude. While too soon to assess the open enrollment season that is still underway, net gains are anticipated to be modest. In the absence of huge Medicaid expansion activity in 2016, there is every reason to expect that coverage levels are close to equilibrium, at least in the short run.

A few data points in the Altarum report are consistent with a potential slowdown in growth. First, growth in spending on health care services appears to have stopped increasing. Services spending growth rose sharply five quarters in a row, starting with Q1 of 2014, as seen here. But during the second and third quarters of 2015, spending growth wobbled and appeared to stagnate. Second and consistently, the jobs series appears to be moderating. After a six quarter rise in average monthly gains in health care jobs, which started in Q2 2014 and peaked in Q3 2015, data from October and November suggest that hiring gains may be slowing.

It makes all the sense in the world that trends in health care services spending and trends in health care hiring are correlated, and we would and should expect these series to move together. Yet as the production function in much of the industry is changing in ways that increase labor productivity, the relationship between the labor force and output may be changing as well. As we can see in Figure 9 and Figure 10, this does appear to be the case, as the ratio of growth in health care utilization to growth in health care jobs rises after 2013.

In other drivers, the topic of prescription drug prices figures largely in electoral politics and in most conversations about health care costs. This component of health care spending rose sharply in 2014 with the introduction of several new and expensive specialty drugs. Since then there have been a handful of other well publicized new market entries or increased prices of existing drugs. While still higher than the overall growth in health care spending, Altarum’s data show decreasing growth for the first three quarters of 2015, with a reduction from 12.2 percent in 2014 to 9.2 percent in Q3 2015. Will this trajectory hold? Hard to say. On the one hand, it appears that spending on Hepatitis C drugs, a major contributor to the jump in growth, has begun to level off. Also carriers and pharmacy benefit managers (PBMs) have started to manage formularies far more aggressively, and there is serious pressure on the industry to “self-regulate” to avoid a worse fate. However, the potential for high priced new products makes this sector of the industry very difficult to predict.

Finally, health care service price growth remained almost eerily low in the first three quarters of 2015, as hospital prices grew very little and physician prices actually fell. These trends have been underway since 2010, and are consistent with the increase in labor productivity noted above. If service providers can continue on this path to increased efficiency, and the potential effect of consolidation on health care prices can be contained, overall growth in health care spending may well be lower in 2016.