Gaining strength

The long slump in healthcare spending, whose growth slowed as the economy plunged into recession and never recovered, may be about to end.

Actuaries at the CMS said last week that healthcare spending growth will gain strength next year as employment and wages recover and the insurance expansion under the Patient Protection and Affordable Care Act finally gets underway.

About 11 million Americans will either buy insurance in the newly created market exchanges or enroll in Medicaid in 2014, federal projections said. As a result, health spending will grow 6.1% compared with 3.8% this year.

While next year's faster health spending growth is closer to the average yearly increases that have turned healthcare costs into a drag on household budgets and a growing source of distress for state and federal budgets, it is still below the average increase of 6.9% for 2000 to 2009. Since 2009, health spending growth has cooled to a pace not seen in the half-century that federal officials have collected data, with growth hovering around 3.9%.

That has led to a heated debate among healthcare economists about whether the slowdown would continue and help alleviate the fiscal strain of healthcare in coming years.

Healthcare is slated to remain a large and growing share of the overall economy. Health spending will total $3.1 trillion next year and increase to $5 trillion by 2022, projections show, rising from its current 17.9% of gross domestic product to 19.9% over the next decade.

Economists responded to the latest federal projections last week with some uncertainty and questions. “We should have more clues in the next couple of years,” David Cutler, an economist at Harvard University, said in an e-mail.

Cutler's own research, published in May in Health Affairs, attributed some of the slowdown to the economy, but said more than half of the soft health spending growth could not be explained by the recession. More efficient healthcare insurance with higher deductibles or co-insurance for patients and fewer brand-name drugs may have accounted for 55% of the flagging growth, according to Cutler's paper. The economy accounted for 37%. The rest was a result of Medicare cuts and a drop in privately insured patients.

Federal projections released last week also gave credit for some of the health spending growth slowdown to use of generic drugs and greater cost-sharing for patients.

Numerous blockbuster drugs—defined as drugs that sell more than $1 billion a year—have lost patent protection since 2011 and contributed to revised federal projections for health spending in 2014. Moreover, demand for costly specialty drugs was less than expected, said Sean Keehan, an economist with the CMS Office of the Actuary, which published the projections online in the journal Health Affairs.

The result, according to the actuaries' study, was an unprecedented decline in drug spending of 0.8% in 2012 and a sluggish increase of only 0.6% in 2013. But with millions more people gaining coverage and fewer blockbusters coming off patent protection, drug spending is expected to climb 5.2% next year, according to the projections.

Health plans with higher deductibles or co-insurance contributed to weaker demand for medical care, federal officials wrote, and will continue to stifle household spending.

The CMS also revised 2014 estimates for the insurance expansion to reflect that some states will take advantage of a 2012 U.S. Supreme Court ruling and won't increase eligibility for Medicaid made possible by the Affordable Care Act. Medicaid spending will jump 12.2% next year with an influx of 8.7 million enrollees. Most of that increase will be picked up by the federal government. Next year, federal health spending will increase 13.8%.

Those newly insured under Medicaid will be younger and without disabilities, so Medicaid spending per person will drop by 2.8%, federal officials said. Also, the newly insured overall will likely be younger and healthier and will likely need less hospital care, but will require more prescriptions and physician visits.

Spending on hospital services will grow a projected 4.7% in 2014 compared with an increase of 4.1% this year. Spending for physician and clinical services will grow 7.1% compared with this year's 3.9% growth.

Chapin White, a senior health researcher for the Center for Studying Health System Change, said the 2014 estimates may be overestimating spending by the newly insured. Medicaid typically pays hospitals and doctors rates that are below those of private insurance. In addition, health plans sold on the new exchanges may also seek lower rates from providers to offer competitive premiums. Hospitals and clinics may not expand capacity to meet demand from the newly insured, he said.

“The actuaries may have overemphasized the spending impact by just looking at demand,” he said.

Some analysts and economists see the sluggish economy as largely responsible for the slowdown.

Stuart Altman, a health policy professor and economist at Brandeis University, said that the stagnant wages in the weak economy have helped to temper healthcare labor costs and slow the sector's price increases.

“That doesn't pop back up overnight,” he said. “That slowdown will continue for a while.”

Altman said the industry has seen some encouraging signs that noneconomic forces could slow health spending growth, but he is skeptical that a systemic change in healthcare delivery is underway and driving slower spending.

“We're not fundamentally changing the system, but we could,” Altman said. “I'm not a super skeptic.”

Research by the Kaiser Family Foundation and the Altarum Institute published in April said the economy accounted for three-quarters of the slowdown and health spending would soar 7% with a recovery.

The newly released federal estimates said the average annual growth rate in health spending during the decade that ends in 2022 will be 5.8%.

The rate is slower than the average for the years 1990 to 2006 of 7.4%, said Gigi Cuckler, an economist with the CMS Office of the Actuary. However, it's still 1 percentage point faster than projected economic growth and will drive healthcare to nearly a one-fifth share of the economy by 2022.

It's unsustainable, even if slower than recent history, said Charles Roehrig, director of the Altarum Institute's Center for Sustainable Health Spending. “It still causes a huge problem in the long run for the federal budget,” he said.

The federal government will continue to play a larger role in healthcare spending, according to the actuaries. Federal spending will account for 49% of national health expenditures by 2022.

The health reform law will increase spending during that period by $621 billion. That amounts to an additional 0.1 percentage point increase per year, on average.

Health spending even at that more modest rate relative to economic growth would require hefty tax hikes or spending cuts in defense and nonhealth spending, Roehrig said.

Roehrig said he believes that federal projections may overstate the gap between health spending and economic growth in later years. Still, he's cautious about any projections. “That's far enough in the future that we're all kind of guessing.”

Follow Melanie Evans on Twitter: @MHmevans