The Altarum Institute’s May health sector trend report shows a continuation of the “slowth” we have gradually grown accustomed to over the past year. Year over year growth in health care spending started a gradual descent in March 2015, which has plateaued in the sub-five percent territory since November 2015.
For Q1 2016, growth in spending on prescription drugs clocked in at a high 7.1 percent, but far more palatable than the 9.5 percent annual spending growth for 2015. The reduced growth in spending was largely a function of reduced sales of Hepatitis C medications, which have fallen steadily in absolute terms since Q2 2015 when they peaked at $3.7 billion. For the first quarter of 2016, reported sales were far lower at $2.2 billion. Spending on prescription drugs is, by nature, less stable than other components of national health expenditures due to the somewhat exogenous shocks that come from the approval of new, usually expensive therapies. The Hepatitis C medications that came to the market in 2014 represented one such shock, but it appears that the bulk of this effect has worked its way through the system. Other shocks will inevitably come, but there is increased commitment on the part of payers and regulators to find new ways to more closely relate drug spending to some measure of value. Manufacturers, for their part, will probably try to avoid the flagrant exercises of market power that have led to so much unwanted attention from consumers and politicians. The slower growth in prescription drug spending represents not just reduced utilization, but also a price effect; drug price growth declined year over year to 3.3 percent in May, compared with 4.0 percent in April.
An interesting subplot developing in these recent trend reports concerns health care services which constitute the largest component of spending. Growth in spending on health care services is slightly below trend, at an estimated 4.3 percent year over year in Q1 2016. These figures will be revised after the release of the June Quarterly Services Survey, and there is some reason to think that they may change. One trend that gives pause is the continued strong pace of health care job growth, which began a steep climb early in 2014 and has remained fairly stable since mid 2015. Thus far for 2016, the monthly average stands at about 40,000 net new jobs per month—a slight reduction from the high of 45,000 reported in the latter half of 2015. On the face of it, this persistently high pace of health care job growth is not consistent with the estimated slowdown in overall spending growth. Especially given changes in worker productivity in health care, either a downward revision in job growth or an upward revision in health care services spending growth is expected.
Hospitals comprise a large component of both job growth and health care services spending, so trends in this sector are always of major interest. Overall hospital prices have risen very slowly in recent quarters. Although the gap between public and private prices is rising, signals on the financial health of the sector are mixed. Despite reports of impending negative margins in Medicare business, a recent MedPAC report noted that record profitability on commercial insurance contracts and improved productivity led to a 30 year high average operating margin of 7.3 percent. These findings have led some to label this the “golden age of the hospital”.
Yet other reports are not so sanguine. Venture capitalist Larry Robbins made news recently with a giant sell off of shares in several investor owned chains. Shares of Tenant and HCA have similarly slumped of late, due to uncertainty related to the recent decision in House of Representatives v. Burwell, as well as more fundamental concerns about the pressures on public reimbursements, high levels of debt, and projections of rising operating costs in the medium to long run. Recent inpatient volume trends are decidedly moderate. One recent analysis of statewide discharge data for 10 states found that inpatient volume change ranged between a fairly sluggish negative and positive two percent between 2014 to 2015. The growth trajectory of this sector, as always, has major implications for health care spending indicators. To the extent to which the golden age continues, the rapid growth in health jobs may persist and spending growth on health care services may rise above their currently low levels. If on the other hand, a slump ensues, reduced job growth and continued slowness in health spending may follow. As of now, the indicators and opinions are decidedly mixed.