Slow Is Still Growth

Staff portrait of Kathy Hempstead

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

There’s been much discussion of health care spending growth trends lately, with recent data suggesting that spending is growing less rapidly than had been expected, and in particular, less rapidly than had been projected on the eve of the ACA in 2010. Many questions remain about the reasons for this slower growth and whether or not it will continue. Last week, a pair of releases from the health care spending experts at the Altarum Institute contributed to the debate with an analysis of the most recent data as well as a much-needed big picture perspective.

First the headline: That low rate of spending growth we have been getting used to just edged a bit higher—health care spending grew less slowly in Q1 2016. Data from the June Census Bureau's Quarterly Services Survey shows growth at 5.6 percent—a good notch above the 4.9 percent reported in Q4 2015. A round-up of the usual suspects help explain why. Prescription drug spending was above trend at 7.1 percent, (although still below the prior peak of 13.1 percent in Q4 2014). Much the same can be said of Administration and the Net Cost of Insurance. Health Care Services—the largest single component of National Health Expenditures—grew at the same rate as spending as whole, rising from a considerably lower 4.4 percent in Q4 2015, as can be seen here.

Much of recent health care spending growth reflects increased utilization related to coverage expansion, with service prices growing extremely slow. In the last several quarters, the growth in utilization slowed, while prices remained relatively low. However in Q1 2016, health service prices rose by 1.6 percent, an increase from 1.1 percent in 2015. Some of this increase seems related to an adjustment to the end of the physician fee bump in Medicaid, which raised prices in 2014, then dropped them in 2015.

A look at prices trends by payer supports this line of thought, and shows that Medicaid is responsible for the 2016 trend. Similarly, a decomposition of health care services spending growth into major components shows that physicians’ offices, rather than hospitals, are the source of the most recent growth in spending. This suggests that the recent increase in service prices may be somewhat of a data artifact related to the prior artificial changes in Medicaid physician rates. If this is the case, we should not see much more of an effect from this going forward. Hopefully that will be the case, since slow growth in health service prices has been an important part of our recent past, with price growth declining from approximately 3.0 percent in 2006 to close to 1.0 percent over the past several years. Along those lines, however, it should be noted that growth in hospital prices also seemed to increase somewhat in Q1 2016.

For their part, the experts at Altarum are not excessively concerned about this uptick in service prices. Charles Roehrig and co-authors argue that a good bit of the increase most likely reflects the adjustment to the physician fee bump in Medicaid. In addition, they note that the quarterly data can be “noisy.” The Q4 2015 growth was somewhat lower than expected, and hence the Q1 2016 data may accordingly be a bit on the high side. In other words, this increase does not signal that the era of slower rates of health care spending growth is coming to an end.

What about the jobs?

One thing that does not at first glance fit easily with the continued “slowth” scenario is the rate of job growth in health care. Altarum reports that in Q1 2016 and the first two months of Q2, growth in health care jobs accelerated to a rate of 3.3 percent, higher than the 2.7 percent growth in 2015. How can slow overall growth co-exist for long with rapid growth in health care jobs? It would seem to foreshadow either increased utilization or a decline in productivity. Utilization growth has exceeded job growth in recent years, yet the 2016 data suggest that a convergence may be approaching. While this may be interpreted as a productivity drop, we may also need to think about the production function in a different way. The much vaunted “transition to value” suggests that the health care work force should be producing health, not necessarily health care services. In fact, some of the fastest sectors of job growth in health care are designed, in part, to reduce utilization. So the inevitable reduction in services per health care worker that will ensue if growth in jobs exceeds growth in utilization should perhaps be seen as a feature rather than a bug. Increased job growth and lower growth in utilization may not in fact be incompatible.

Finally, while some wondered recently whether health care spending growth may not be increasing fast enough another recent release by the Altarum Institute’s Roehrig reminds us that even this lower rate of growth may be unacceptably high. In a Health Affairs Blog post, Roehrig projects the difficult trade-offs that lie ahead, even under even the most rosy scenarios. Glance, if you dare, at the “triangle of painful choices” in Exhibit 1, which details a set of difficult decisions that must be made between health care, tax rates and defense and other non-health spending. Even under the rather optimistic assumption that health care spending grow no more quickly than the economy itself; we will, before long, be forced to choose between an unpleasant combination of significant tax increases and/or cuts in defense and non-health spending. As Roehrig notes, reducing health care spending to a lower share of GDP, difficult and unlikely as that may be, provides our best hope of making these choices “...somewhat more palatable (although still very painful).”