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Reform Update: Healthcare spending growth expected to pick up this year to 5.6%

By Melanie Evans
Posted: September 3, 2014 - 4:00 pm ET

The economy's lackluster recovery eroded wages and left millions chronically unemployed. It also offered significant relief from the fiscal distress of U.S. health spending. Now, spending fueled by the improving economy and the healthcare reform law's insurance and Medicaid expansions are likely to turn that around.

Health expenditures grew 3.6% last year, with the delayed and soft recovery a primary cause, according to projections by CMS actuaries published online by the journal Health Affairs. If the projection is confirmed later this year, it would mark the fifth straight year of growth below 4% and the second time in three years national health spending growth dipped to a historic low.

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Economists are divided over how long the health spending slowdown will last. Not long, said actuaries behind the latest numbers. That's in part because of an expected spending spike under the Patient Protection and Affordable Care Act. Projections for this year predict growth of 5.6% as the health reform law's health insurance mandate, health plan subsides and public insurance expansion go into effect.

The news in the projections isn't entirely bad. The 5.7% average annual growth through 2023 is less than the 7.2% average annual growth in health spending between 1990 and 2008, and the historical 2 percentage point gap between fast-rising healthcare expenditures and the economy.

“A key factor in our projection is not only the effect of the recession but the slow economic recovery,” said Andrea Sisko, an economist with the agency that oversees Medicare and Medicaid who helped produce the figures.

That assessment will be unwelcome among those that hope to see more modest health spending persist and are looking for signs that the slowdown signals meaningful changes in the way healthcare is delivered and paid for. The slowdown—which predated the recession but grew more pronounced as the economy contracted—has met with guarded optimism from some policymakers, who say the continued tepid growth may signal a shift toward a more efficient, less error-plagued health system. But skeptics contend the economy is a more likely culprit, as workers scaled back spending on doctors or pharmaceuticals during and after a recession that wiped out health benefits, wages and consumer confidence.

Health spending will also rebound with the economy as businesses add jobs, workers gain health benefits and consumer confidence grows, federal economists said. Growth will average 5.7% per year for the next decade, fast enough to outpace annual economic growth by 1.1 percentage points.

Experts behind the projections said it's too soon to say whether spending will decline thanks to efforts underway that seek to improve the quality and lower the cost of healthcare. “We don't have any explicit impact for any of these innovations at the current time,” said CMS economist Sean Keehan. “There's just not enough evidence.”

Sisko said the drag from the economy is partially responsible for the slower growth through 2023 compared with recent decades. Rapid acceleration in prescription drug spending also contributed to the strong health spending growth during the late 1990s and early 2000s, she said.

Growth in drug spending has been moderate to imperceptible in recent years as generic drugs eclipsed their more expensive brand-name versions that lost patent protection. Pharmaceuticals account for about 10% of health expenditures, which is large enough to make a difference “if you go from a period where blockbusters are everywhere, to a period where blockbusters are nowhere,” said Paul Huges-Cromwick, an economist with the Altarum Institute. Drug spending increased 0.4% in 2012 compared with 11.6% in 2000.

Low overall inflation since the recession has also helped to hold down healthcare prices, said Charles Roehrig, director of the Altarum Center for Sustainable Health Spending.

Healthcare entered the recession with a slowdown underway, Roehrig said. Payment rates to doctors were already cooling and high-deductible health plans were gaining traction.

Growing use of those plans is another factor that federal actuaries said will keep health spending growth below the more robust pace of recent decades.

Less use of medical services among Medicare enrollees is projected to dampen growth, too. Medicare spending growth slowed in 2013 to 3.3% from 4.8% in 2012, and it will slow further to 2.7% in 2015, according to the projections. That's in part because of federal spending cuts but also thanks to less use of medical services, particularly hospital visits, the actuaries said. Greater demand for services as baby boomers age will prompt Medicare spending to accelerate starting in 2016.

Follow Melanie Evans on Twitter: @MHmevans

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