Coverage Declines May Slow Health Care Spending Growth

Staff portrait of Katherine Hempstead

Katherine Hempstead, PhD, MA, senior adviser to the executive vice president, leads RWJF's work on health insurance coverage.

The March 2018 Health Sector Trend Report from the Altarum Institute reports trends in health care spending through 2017. The estimated total spending growth of 4.6 percent for the year represents a slight increase over 2016, but once these figures are adjusted for prescription drug rebates, we may well find that 2017 was a year of declining health care spending growth.

Signs of a slowdown in growth are evident in health care services spending, which accounts for roughly 70 percent of overall health spending. Spending on this component increased 4.4 percent in 2017, as compared with 4.8 percent in 2016. In another sign of slowing, health care job growth declined from a height of 32,000 per month in 2016 to 24,000 for 2017, and the rate of health job growth is now more closely approaching that in the rest of the economy.

Coverage is Declining

The recent growth in health care spending has been largely driven by the coverage expansion created by the Affordable Care Act (ACA), and the signs of slowing spending growth are accompanied by clear evidence that the increase in coverage has started to go into reverse. Recent data from the Gallup survey show an increase of 1.3 percentage points in the uninsurance rate among non-elderly adults, suggesting that more than one fifth of the ACA coverage gains had evaporated by the end of 2017.

At least in the short run, we should probably anticipate more of the same. The fundamental problems driving unaffordability in the individual market have been compounded by recent developments such as the elimination of the individual mandate and the proposed liberalization of rules governing short-term and association plans. It appears no relief will come from any federal stabilization measures like reinsurance which are now legislatively dead. While some states will take steps to improve their markets, others will make moves that go in the opposite direction. Overall, it’s hard to imagine the size of the individual market increasing in 2019, aside from the potential for new enrollment in less comprehensive short-term plans. Medicaid is also less likely to be a vehicle for coverage expansion in the short run. New features such as work requirements being added to a number of state Medicaid programs are predicted to have a chilling effect on enrollment. There is the potential for Medicaid expansion in a number of states, the most likely being Virginia, but this is far from assured. Everyone would like to see a decline in health care spending growth, but few would like to see this accomplished through a reduction in coverage, and, longer-term, it is far from clear that decreasing coverage would result in lower spending growth.

Prices Are High, but Have Been Rising Slowly Overall

As compared with other countries, the very high level of health care spending in the United States is largely a function of the relatively high prices we pay for health care services, prescription drugs, and administrative costs.

Yet the increase in health care spending growth over the past few years largely reflects increased utilization resulting from coverage expansion. Health care service prices, while extremely high, have grown relatively slowly in recent years. This can be seen in Figure 5, which shows the overall trend in health care service prices at or below GDP growth since 2011 (though this appears to be changing with initial 2018 data showing an acceleration of health care prices).  

Commercial Segment Is Different

This overall trend, which includes all payers, clearly differs from the greater commercial price growth, and the widening difference in public and private provider rates. For example, the recent HCCI analysis of spending in 2016, reported far higher year over year price increases for inpatient and outpatient care of 4.5 percent and 2.6 percent, respectively. In a virtual inverse of the trends shown here, the HCCI analysis finds that spending growth is driven by increased prices, while utilization remained largely unchanged or in some categories declined. In certain instances, with “intensity” in health care service delivery, it can be quite arbitrary distinguishing prices and quantities.

Changes in Utilization

Many attempts at cost control focus on reducing the intensity of utilization by diverting from more to less costly settings and/or substituting different kinds of telehealth services for actual visits. Figure 4 of the Altarum report tells an interesting story, by decomposing health care services spending growth is disaggregated into two main components—hospitals, and physician and clinical. Between 2006 and 2014, spending on hospital care grew at a higher rate than spending on the physician and clinical category, but since 2014, hospital spending growth has been markedly lower and declining. This pattern may reflect the way in which coverage expansion affects relative growth in different kinds of health care service use, but it may also show the impact of other kinds of delivery system changes. Consistent with the latter, the HCCI report describes stagnant or declining utilization in their commercially covered population, with the sharpest decline in the inpatient category, where utilization declined by 12.9 percent between 2012 and 2016.

The recent growth in health care spending has been powered by utilization growth coming from coverage expansion, but at least for now, this source of growth has dried up. It would appear that utilization in many categories is also moderating among the commercially covered populations. Put together, these trends are suggestive of continued softening of volume in the short run, particularly in hospitals.