Health Care Prices Are Showing A Little Momentum

Staff portrait of Kathy Hempstead

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

This month’s trend report from the Altarum Institute largely shows a continuation of the slowing growth in health care spending we have enjoyed lately. Overall health care spending growth sequentially declined during the last three months of 2015—from 5.4 percent, to 5.2 percent, to 4.9 percent. This continues a slowing pattern that began in early 2015, after growth peaked at 6.8 percent in February.

This slowdown in spending has resulted primarily from the end of a period of rapid coverage expansion, as the ACA-fueled growth in private coverage and Medicaid is largely in place. The growth in coverage affected spending primarily through increased utilization of health care services and prescription drugs. A reduction in spending growth in these major components can also be seen. For example, hospital spending growth, which also peaked in February at 7.9 percent, is on a downward trajectory, dropping to a 3.9 percent growth rate in December. Growth in prescription drugs spending, while still above overall trend, has also declined notably, from 11.7 percent to 6.6 percent in December (with a slowdown in spending on Hepatitis C drugs playing an important role).

Spending reflects both prices and utilization, and the role of increased utilization in the recent rise and fall of spending growth is clear to see. But what role is played by prices?

The high price of prescription drugs has been a major public issue, resulting in Congressional hearings, and finding its way into a number of campaign platforms. And despite—or perhaps because of—this furor, drug prices have been growing more slowly in recent months. The rate of price growth for prescription drugs declined throughout 2015 from 5.6 percent in January, to 2.4 percent in December. This reduction in price growth explains much of the decline in overall spending on drugs, but declining growth in utilization was important too. A significant slowdown in Hepatitis C sales in the last quarter of 2015 likely reflects some combination of increased discounts and a slowing of new utilizers. In any case, spending on Hepatitis C played a measurable role in the rise in overall spending that took place during 2014 through early 2015 but is now contributing to the slowdown.

So it would appear that most of the major factors associated with health care spending—utilization and prescription drug prices—are moving in a direction consistent with lower rates of spending growth. But what about health care prices?

Price growth for health care services has been a complete non-issue of late, with growth rates at historical lows for the last several quarters. Yet things may be changing, as Altarum reports that the monthly Health Care Price Index rose from 1.2 percent to 1.6 percent in January of 2016. While still a relatively small increase, there are reasons to believe this rise in prices may persist, in part because there is more general price inflation overall.

Altarum finds that Medicaid pricing policies are an important driver of the recent increase in health care price growth. Medicaid enhanced payments to primary care providers ceased in January 2015, meaning that prices paid for primary care fell in 2015. This caused overall health care price growth in 2015 to be unusually low. Since these prices were not reduced again in 2016, Medicaid prices growth was abruptly higher in January 2016, contributing to a jump in overall health care prices.

The recently released ACAView report from athenahealth provides some additional support for the notion that health care prices may be rising. Their analysis of millions of visits to primary care providers shows an increase in the intensity of practice, as measured by work relative value units (RVUs) per visit, diagnoses per visit, and the number of visits with high complexity codes. That, combined with a modest rise in allowables, translates into an increase in visit prices.

The continued high growth in health care jobs in January suggests that the sector is not slowing down. And while other cost drivers may be moderating, it could be time to turn our attention once again to health care prices.