Has the Slowdown in Spending Growth Arrived?

The recent trend in job growth fits well with what we see in overall spending. Health care jobs rose impressively for six straight quarters, peaking in Q3 2015. For hospitals, job growth topped out in July of 2015 with a net gain of 22,000. Overall, 2015 was a huge year for hospital hiring, with a net gain of 172,000 jobs, more than four times the number added in 2014. But in each month since July, the number of jobs added has declined, to a low of 12,000 in December. Since labor productivity in health care, (as roughly measured by the ratio of work force to services) has been increasing, the growth in jobs may in some ways understate the increase in capacity in the sector. That is particularly interesting in the hospital context, where inpatient volume has softened in recent years. It will be interesting to see how the occupational composition of the hospital workforce has changed, an examination which should, among other things, show an increased share of hospital workers providing outpatient services.

We have observed many times that growth in health service prices remains extremely low, and this month’s trend report suggests that this trend is continuing, reporting an annual increase in health care prices for 2015 of 1.1 percent, the lowest recorded since Altarum’s series began in 1990. Given the flatness of this series, the two drivers of the recent growth in health spending have been coverage expansion and spending on prescription drugs. The former is clearly slowing, and the impact of that slowing on health care service spending and job growth can already be seen. But what about prescription drugs?

This month’s report contains some interesting tidbits on this topic. First, as noted last month, prescription drug spending growth declined from a super-high 12.2 percent in Q1 2015 to a still fairly-high 9.2 percent in Q3 2015. While still well above the overall spending trend, this was a noticeable decline in growth. From what we can see from the first two months of Q4 2015, there was very little additional fall off, as spending growth clocked in at 9.1 percent. Interestingly, while the declining growth in overall prescription drug spending appears to have levelled off at around 9 percent, the growth of prescription drug prices actually declined more throughout 2015, and kept declining throughout the year—dropping from 5.5 percent in Q1 to 3.2 percent in Q4.

Spending is a function of prices and utilization. But in the case of prescription drugs, the prices are what have received all the attention recently from policymakers and advocates. We have seen some public shaming of pharma, harder bargaining from payers, and discussions of more and less nuanced policy approaches to the prices of expensive specialty drugs, in particular. During this time, there may have been some quiet “self-regulation” by industry, as witnessed by the downward trend in price growth. But if there are offsetting trends in utilization, or declines in price growth are less manifest among more commonly used medications, prescription drug spending—still well above overall trend—will be the driver to watch as we move into 2016.