Reform Update: No Obamacare spending bump just yet, economists agree

The newly revised estimate that puts U.S. healthcare spending on track to contract 1.4% this year should quell fears of a massive first-quarter jump in outlays thanks to Obamacare.

The U.S. Commerce Department's Bureau of Economic Analysis had pointed in the direction of a possible surge with its initial estimate for first-quarter spending, but two revisions later, that doesn't seem to be the case. This third and final revision put health spending on pace to decline 1.4% for the year, a dramatic reversal from an earlier federal estimate of nearly 10% growth and a major contributor to a 2.9% decline in U.S. economic activity in the quarter. The bureau does not release the actual quarterly spending data, only annualized projections based on that data.

This final revision for the quarter “illustrates the risks of trying to make inferences about long-term healthcare cost growth from noisy quarterly data,” said Jonathan Skinner, a professor and healthcare economist at Dartmouth College.

The first three months of the year were more noisy than usual with the start of the nation's health insurance expansion push under the Patient Protection and Affordable Care Act. Millions were expected to gain insurance as the year began, but many waited to enroll until March—the final month to gain subsidized private coverage under the law. The Bureau of Economic Analysis in April sought to estimate demand from the newly insured with an initial estimate of 10% annualized growth. But more accurate survey data on demand during January, February and March were not available until this month, so many economists expected a downward revision.

The health spending contraction in the latest estimate accounted for the bulk of the contraction in consumption in the overall economy, which made up two-thirds of the drag that shrank the nation's gross domestic product by 2.9%, said Ian Shepherdson, chief economist for consultancy Pantheon Macroeconomics. “So much for the BEA's initial view that the start of Obamacare triggered a surge in spending on healthcare,” he wrote.

The Obamacare bump in spending will take time to materialize. Second-quarter data may include spending for trips to the doctor or hospital by those newly insured in March, said Charles Roehrig, an economist and director of the Altarum Institute's Center for Sustainable Health Spending. “Once you gain coverage, it takes a while to establish yourself with a physician.”

The first-quarter spending estimate is the third from the bureau and considered by economists to be the most accurate. Nonetheless, the figure is a limited health spending snapshot that excludes public health, capital investment by hospitals and consumer purchases of pharmaceuticals. Economists cautioned a three-month window is a poor indicator of spending trends.

The estimate looks at annualized spending for January, February and March compared with spending the prior three months.

More time and data are needed to grasp how health spending will change with ACA enrollment and the economy, economists said. Skinner said he continues to project growth of 1.2% above GDP gains. “There's nothing that I've seen in the data that leads me to think that I'll be wrong, but there's nothing that I've seen in the data that leads me to think that I'm right,” he said. “It's too soon to tell.”

An analysis by the Altarum Institute found 12 quarters since 1970 when Bureau of Economic Analysis estimates captured a contraction in annualized health spending, which is an estimate for the year based on spending trends for a quarter. That included an annualized contraction of 2.5% for the first quarter of 1982. But not once has a full year then actually seen negative growth, said Paul Hughes-Cromwick, a senior health economist for the institute's Center for Sustainable Health Spending.

Harsh winter weather and delayed health insurance enrollment likely contributed to a deceleration in health spending during the first quarter compared with the final months of 2013, Roehrig said. The deceleration, however, was surprisingly steep, he said.

Medicare officials were not shy about the potential for accountable care's growth during remarks in Washington last week. “We are not dispassionate about this program,” Sean Cavanaugh, director of the CMS' Center for Medicare, told attendees of the National Accountable Care Organization Summit. “We expect and plan to add ACOs annually from here on out,” John Pilotte, director of the performance-based payment policy group at the Center for Medicare, separately told the crowd.

The next deadline for ACOs is July 31 to start in January 2015. Meanwhile, accountable care organizations already under Medicare contracts are awaiting a proposed rule for the next round of three-year contracts. Expect the rule soon, Cavanaugh said.

Experts and advocates of accountable care at the Brookings Institution’s Engelberg Center for Health Care Reform proposed a few fixes to issues that Medicare accountable care organizations say have inhibited their ability to take full advantage of the evolving payment model. “Future growth of the Medicare ACO program will depend on providers having the incentives to become an ACO and the flexibility to assume different levels of risk, ranging from exclusively upside arrangements to partial or fully capitated payment model,” they wrote in a paper that outlines key issues. Those issues include how to set financial benchmarks used to award bonuses or assess penalties, and the shift toward capitation.

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