Healthcare Spending: CMS Researchers See a Mixed Landscape on Inflation

Real deceleration in healthcare utilization moderated healthcare spending Inflation in the United States in 2016, according to an analysis just published Wednesday in the Health Affairs Blog, though signs are now present that trends around healthcare inflation may well return to historical patterns. Those were some of the key findings of a team of...

Real deceleration in healthcare utilization moderated healthcare spending Inflation in the United States in 2016, according to an analysis just published Wednesday in the Health Affairs Blog, though signs are now present that trends around healthcare inflation may well return to historical patterns. Those were some of the key findings of a team of researchers from the National Health Expenditures Team at the federal Centers for Medicare and Medicaid Services (CMS), including Micah Hartman, Anne B. Martin, Nathan Espinosa, and Aaron Catlin (the article made it clear that the commentary represented the views of the authors, and not official CMS commentary).

“Total nominal U.S. health care spending increased 4.3 percent and reached $3.3 trillion in 2016,” the researchers reported”—with that $3.3 trillion (actually $3.337 trillion) surpassing the $3.2 trillion total in 2015 and $3.026 trillion in 2014. “Per capita spending on healthcare increased by $354, reaching $10,348. The share of gross domestic product [GDP] devoted to health care spending was 17.9 percent in 2016, up from 17.7 percent in 2015 [and 17.2 percent in 2014]. Health spending growth decelerated in 2016 following faster growth in 2014 and 2015 associated with coverage expansions under the Affordable Care Act (ACA) and strong retail prescription drug spending growth. In 2016 the slowdown was broadly based, as spending for the largest categories by payer and by service decelerated. Enrollment trends drove the slowdown in Medicaid and private health insurance spending growth in 2016, while slower per enrollee spending growth influenced Medicare spending. Furthermore,” the article’s authors wrote, “spending for retail prescription drugs slowed, partly as a result of lower spending for drugs used to treat hepatitis C, while slower use and intensity of services drove the slowdown in hospital care and physician and clinical services.”

Why had inflation slowed in the few years leading up to 2016? “Over the past ten years the health sector has experienced major changes influenced largely by overall economic conditions, a low inflationary environment, and a more recent dramatic increase in health insurance coverage associated with the Affordable Care Act (ACA),” the article’s authors wrote. “During the period 2008–13, health care spending increased at historically low rates of growth, averaging 3.8 percent per year. Over this period, the Great Recession of 2007–09 and the subsequent mild recovery affected health insurance coverage and the use of health care. Additionally, medical price inflation was at historically low levels, in part because of lower economywide price growth and various legislative actions aimed at slowing health care spending growth.”

But things had sped up again in 2014-2015, the authors noted. “Following that period, 2014 and 2015 saw dramatic increases in health insurance enrollment, as major provisions of the ACA expanded insurance options under private health insurance Marketplaces and the Medicaid program—factors contributing to 8.7 million people gaining private health insurance and 10.2 million gaining Medicaid coverage in 2014 and 2015,” they noted. “In addition, growth in spending for retail prescription drugs was very strong in 2014 and 2015 (12.4 percent and 8.9 percent, respectively), mainly the result of an increase in spending for hepatitis C medication. As a result, health care spending increased 5.1 percent in 2014 and 5.8 percent in 2015.”

Importantly, of course, the researchers noted, “Within the ten-year period 2007–16, the US experienced, among other events, the most severe economic recession since the Great Depression, followed by a mild economic recovery; medical price inflation that was at historic lows; and major changes to the health care system associated with the ACA. During these years, health care spending increased at the lowest rates in the history of the National Health Expenditure Accounts, but low economic growth led to an increase of 2.0 percentage points in the share of the economy devoted to health care, from 15.9 percent in 2007 to 17.9 percent in 2016. The resulting average increase of 0.2 percentage point per year is nearly equal to the historical annual average over the past half-century.”

In other words, inflation in overall U.S. healthcare spending has now returned to something like “normal,” at least as gauged by historically predictive patterns. “In 2016, as expected, health care spending growth slowed following the major expansion of health insurance coverage in 2014 and 2015, when the ACA expanded eligibility for the Medicaid program and provided access to private health insurance marketplaces,” they wrote. “The insured share of the population stabilized at 91 percent in 2016, the same as for 2015 but higher than the shares of 89 percent in 2014 and 86 percent in 2013.”

Meanwhile, they said, “The slower growth in health care spending in 2016 was more in line with the average annual rate of growth during the period 2008–15 and was higher than growth for the overall economy. Because the unique factors that influenced the health sector over the past decade did not have as great an effect in 2016, this may be an initial indication that this year marks a return to the more typical relationship between annual rates of growth in health care spending and growth in nominal GDP. As a result, future health care expenditure trends are expected to be mostly influenced by changes in economic conditions and demographics, as has historically been the case.”

What about hospital and physician care spending? Hospital spending in 2016 represented 32 percent of total U.S. expenditures, the same as since 2013; but the inflation rate was 4.7 percent, slower than the 5.7 percent in 2015. Slower growth in hospital care spending last year “reflected slower growth of 2.3 percent in the use and intensity of services, which was lower than the increase of 3.4 percent in 2015. This deceleration followed two years of accelerated growth in nonprice factors, as utilization increased in 2014 and 2015 largely because the share of the population with health insurance increased (from 86 percent in 2013 to 91 percent in 2015)—a result of implementation of the ACA and improved economic conditions.

Meanwhile, “Total spending for physician and clinical services grew 5.4 percent, reaching $664.9 billion, and accounted for 20 percent of total health care spending in 2016,” the researchers found. “Although growth was slightly slower in 2016 than in 2015 (5.9 percent), spending on physician and clinical services increased more rapidly in 2016 than expenditures for all other health care goods and services,” with “continued strong growth in spending for freestanding ambulatory surgical and emergency centers contribut[ing] to the faster growth in spending for clinical services,” and indeed, with “growth in the use and intensity of physician and clinical services… a driving factor in overall growth in spending for physician and clinical services, accounting for almost three-quarters of the 5.4 percent increase,” despite a deceleration in Medicare and Medicaid spending on physician services.