Cost growth projected to climb; can ACA initiatives slow it down?

The U.S. economy's lackluster recovery from the Great Recession eroded wages and left millions chronically unemployed. But it also gave the nation a break from rapidly rising healthcare spending. Now, though, medical spending is likely to resume its growth, fueled by the improving economy, Obamacare's coverage expansion, an aging population and the high cost of new specialty drugs, according to last week's report from federal actuaries.

Many policymakers and healthcare providers say it's a good thing to spend more to provide health coverage for a larger percentage of the American population. The big question, however, is whether cost-control efforts propelled by federal policy and market dynamics will be able to counter those factors driving up spending. Healthcare experts remain divided in their views.

Total health spending was projected to grow 3.6% in 2013, with expenditures staying at 17.2% of gross domestic product for the second straight year, according to a report from the CMS Office of the Actuary published online last week by the journal Health Affairs. If the projection is confirmed 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 after 18 years of 7.2% average annual growth.

But the actuaries projected that 2014 spending would grow 5.6% as the Patient Protection and Affordable Care Act extends coverage to 9 million uninsured Americans, and that expenditures would continue to grow 6% a year from 2015 to 2023. That's 1.1 percentage points faster than the projected GDP growth during that period.

“The period in which healthcare has accounted for a stable share of economic output is projected to end in 2014, primarily because of the coverage expansions of the ACA,” the actuaries wrote. “It is anticipated that by 2017, once the mostly one-time transitional effects of expanded coverage have fully transpired, the health share of GDP will increase, albeit at a slower rate than its historical average, as an improving economy and the aging of the baby boom generation lead to faster health spending growth.”

The news isn't bleak. The growth projected by the actuaries is significantly slower than the 7.2% average annual spending increase between 1990 and 2008, when healthcare spending outpaced GDP by 2 percentage points. Still, at the projected growth rate, the health share of GDP is expected to rise from 17.2% in 2012 to 19.3% in 2023, when spending will total $5.2 trillion compared with $2.8 trillion in 2012.

The “more favorable economic conditions” in 2014 and beyond “are expected to result in greater demand for healthcare goods and services, increases in health coverage and faster rates of health-spending growth, particularly for private health insurance,” according to the actuaries' report. “However, these rates of increase are expected to be dampened somewhat by the slower growth in Medicare payment rates mandated by the ACA and the ongoing trend toward higher cost-sharing requirements for the privately insured.”

The new projections showing a continued healthcare spending slowdown for 2013 offer tantalizing clues but no certainty for policymakers and healthcare stakeholders who have puzzled and wrangled over the relatively moderate growth that started in 2009. “We know what's going on,” said Jonathan Oberlander, a health policy professor at the University of North Carolina at Chapel Hill. “We don't exactly know why.”

The question of why matters a lot to federal budget writers, private businesses and households, because higher health costs squeeze the rest of the economy, driving down investment, wages and consumer spending. If the struggling post-recession economy was the primary reason, health spending is likely to accelerate again with recovery.

The CMS actuaries said last week that the Great Recession and the slow economic recovery were largely responsible for the health-cost slowdown and that evidence of the impact of the healthcare reform law's cost-control initiatives is scant. “We don't have any explicit impact for any of these innovations at the current time,” CMS economist Sean Keehan said. “There's just not enough evidence.”

That did not stop the Obama administration from claiming the moderate 2013 health-spending increase as a victory for Obamacare. “While the actuaries project that the recent slowdown will largely dissipate as economic recovery continues, the balance of evidence implies that much of the recent healthcare-spending slowdown has been driven by structural changes, which suggests that a significant portion may persist,” the White House said on its blog.

Jonathan Gruber, an economist at the Massachusetts Institute of Technology who helped draft the Affordable Care Act and the Massachusetts healthcare reform laws, said the prolonged duration of the health-cost slowdown suggests that more than the economy was responsible. Unlike the cost slowdown that occurred with managed care in the 1990s, efforts to contain spending are more widespread and systematic. Health plans with high deductibles expose consumers to a bigger share of medical bills, and an entire industry has emerged to help employers and consumers comparison-shop for lower prices and better quality of care. Meanwhile, he noted, insurers are competing more aggressively on premiums on the Obamacare exchanges. In addition, alternative payment and delivery models such as accountable care are rewarding efficiency and lower costs.

But Joseph Antos, an economist with the conservative American Enterprise Institute, said it's mainly the Great Recession and the slow recovery that get the credit for dampening healthcare spending growth. Households responded to the economic downturn by spending less, including cutting back trips to the doctor and pharmacy and delaying elective procedures.

The CMS actuaries' projections show growth will swing sharply upward in 2014 with millions of newly insured under the Affordable Care Act. As the economy recovers and baby boomers age during the next decade, growth will exceed 6% a year, the actuaries predicted. That acceleration, however, is not as fast as in the two decades before the recession, when healthcare spending growth outpaced the economy by 2 percentage points. Projections through 2023 show an annual 1.1 percentage point gap, on average, between health spending and economic growth.

Oberlander stressed that greater access to healthcare through insurance expansion was one of the reform law's chief goals, and higher spending is worth it. “I think a lot of us would say it's a pretty good trade-off,” he said.

The actuaries reported that in 2013, before insurance expansion, hospital spending growth cooled as Medicare paid less under federal budget sequestration. Fewer hospitalizations also contributed to the slowdown. But demand is projected to increase as aging baby boomers grow increasingly frail and the economy improves, the actuaries said.

Doctors also will see increased demand because of the Affordable Care Act's coverage expansion. But lower payment rates will hold spending in check, the actuaries said.

On the other hand, spending growth will be lower than it was in the 1990s and 2000s because of lingering effects of the recession, more consumers with high-deductible health plans and the lack of high-priced blockbuster pharmaceuticals that were prevalent in that earlier period. Blockbuster drugs lost their patents in recent years and generic use increased, which helped to hold drug spending to 0.4% growth in 2012 and a projected 3.3% rise in 2013.

Drug spending can drag down overall health spending “if you go from a period where blockbusters are everywhere to a period where blockbusters are nowhere,” said Paul Hughes-Cromwick, an economist with the Altarum Institute.

Still, drug spending is projected to accelerate as more Americans gain insurance coverage and also because of costly new hepatitis C treatments. The drugs Sovaldi and Olyio are projected to cost Medicare up to $5.8 billion in 2015, according to accounting firm Milliman. Sovaldi's price tag is $85,000 for a full course of treatment.

The potential introduction of other high-priced, high-demand drugs in the next decade underscores how uncertain health spending projections can be, Antos said.

The actuaries would not predict how Affordable Care Act-related policy changes such as bundled payment or emerging market forces would affect cost growth. Mark Pauly, a health policy professor at the University of Pennsylvania, said the projections seem to say, “ 'We think things are going to be somewhat different, but not all that different.' ”

Even if U.S. healthcare spending grows more slowly than in previous decades, that doesn't change the fact that this country spends far more than any other advanced country on healthcare, and lots of hard work remains to be done to get more efficient, Oberlander said. “We've got a long, long way to go.”

Follow Melanie Evans on Twitter: @MHmevans