Spending jump puzzles providers

Hospital and medical lab companies say demand for services dropped early this year because of the harsh winter. But you wouldn't know it from federal estimates showing 9.9% annualized growth in healthcare spending in the first quarter of 2014. At the same time, healthcare prices increased at an annualized rate of only 0.5%.

Experts speculate that the Patient Protection and Affordable Care Act's insurance expansion played a big role in that jump. During the first quarter, millions of Americans gained private insurance or Medicaid coverage under the law, which may have allowed people with pent-up medical needs to obtain treatment. Still, the disconnect between the federal spending estimates and healthcare companies' latest financial reports is puzzling.

Last week's Bureau of Economic Analysis' estimates, though preliminary, captured the attention of economists watching to see if healthcare spending rebounds after years of slow growth. According to the BEA's figures, spending on hospitals, doctors, nursing homes and other healthcare services will increase $44.3 billion this year if the first quarter's pace of spending holds. The BEA attributed the spending rise to ACA implementation.

That surge helped buoy the overall economy during the first quarter, which grew overall only 0.1%. “If healthcare spending had been unchanged, the headline GDP growth number could have been -1%,” wrote Ian Shepherdson of Pantheon Macroeconomics. Growth in hospital and physician spending following the insurance expansion indicated significant delayed demand, he said. “Next question: How long will it last?”

The estimated spending increase also suggests that government and private sector relief over the slowdown in medical spending may be short-lived.

Scott Hoyt, senior director of consumer economics for Moody's Analytics, said newly insured patients were behind the higher spending, and last-minute enrollments in March and April may drive a spending bump for the second quarter as well. After that, spending growth is expected to taper off. Nonetheless, growth in the first two quarters is “a real source of increased demand in the industry that has the potential to spark hiring and investment,” he said.

According to the BEA, hospital spending in-creased 7.1% in the first quarter this year compared with the same quarter a year ago, while physician spending increased 5%.

But those figures are not consistent with first-quarter results for some large U.S. provider systems, including LifePoint Hospitals and HealthSouth Corp., and ancillary companies such as Quest Diagnostics and Laboratory Corporation of America. Hospital operators reported fewer admissions. Brentwood, Tenn.-based LifePoint, which operates 61 hospitals across 20 states, said same-facility admissions dropped 5.3% during the first quarter. The 120-hospital HCA chain, based in Nashville, reported a 0.6% same-facility slide.

Healthcare spending growth since the recession has hovered at record lows below 4%, and the prolonged slowdown raised hopes that public and private initiatives to increase efficiency and reduce costs have yielded results.

Meanwhile, last week's preliminary jobs report from the U.S. Bureau of Labor Statistics showed that seasonally adjusted healthcare hiring rose only 0.1% in March, with hospital hiring stagnant.

Economists said the new BEA estimates will be revised twice and should be regarded with caution.

Still, the Obama administration moved swiftly to calm anxieties about higher healthcare spending. In a blog post, White House officials described the acceleration as “neither a surprise nor a cause for concern. … Any upward pressure on healthcare spending growth from expanding insurance coverage will cease once coverage stabilizes at its new, higher level, so it does not affect the longer-term outlook for spending growth.”

An analysis of healthcare prices by the Altarum Institute's Center for Sustainable Health Spending also shows low price growth, roughly 1%, in recent months. That suggests the spending jump is being driven by higher utilization, said Charles Roehrig, director of the center.

But health systems are not reporting higher utilization. Analysts and executives attribute the utilization drop-off to the economy's slow recovery, dampening of consumer demand because of high-deductible health plans, and Medicare's pressure on hospitals to handle short-stay patients through outpatient observational care.

This year's frigid winter and mild flu season compounded the trend, system executives said. HealthSouth, the Birmingham, Ala.-based operator with 101 hospitals across 27 states, cited winter storms as a reason for a 2.4% drop in discharges. Moody's Investors Service analysts are seeing “volumes down significantly” because of the bad winter weather and the Medicare rule, though first-quarter data are incomplete.

Follow Melanie Evans on Twitter: @MHmevans