Healthcare spending grew faster than the rest of the economy last year despite the ongoing reduction in hospital use and an industrywide campaign to hold down costs. How can that be?
Spending on hospital, physician and dental services account for nearly 60% of the U.S.' $3.15 trillion healthcare economy. It seems logical that any rebound in overall spending would be tied to sharp increases in those inpatient and outpatient services.
Yet a new report from the Altarum Institute, which showed healthcare grew 5.6% in 2014 or faster than the 3.8% increase in gross domestic product, revealed slower-than-average growth in every direct-service category. Hospital expenditures grew 5.4%; physician and clinical services grew only 2.9%; and dental services grew just 3%.
How about residential, personal care and home-health spending, which are growing in popularity because of the shifting preferences of seniors? All are below the 5.6% average. Nursing and retirement home spending also remains in check—a 3.9% increase.
Only three categories grew substantially faster than average: prescription drugs (up 13%); durable medical equipment, which includes implantable medical devices (up 6.3%), and health insurance industry overhead (up 10.6%).
Those three categories accounted for only 13.4% of all health-related spending last year. But had they grown at the same rate as hospitals, total spending would have been under 4.5%.
While that's slightly faster than the overall economy, a 4.5% growth rate would have been greeted by economists as another year of welcome moderation in overall spending.
One doesn't have to look far for an explanation of what's going on in those sectors. After a sharp falloff in drug spending early in this decade because of the expiration of patents on a number of popular name-brand drugs, the global pharmaceutical industry has regained its mojo.
Its new strategy for maintaining the industry's very high profit margins involves slapping sky-high prices on specialty drugs like Sovaldi for hepatitis C infections. In the first three quarters of last year, when Sovaldi racked up more than $8 billion in sales, parent company Gilead Sciences posted a profit margin of nearly 50%.
The insurance industry has benefited handsomely from the launch of the healthcare reform law. Stock prices and profits soared in 2014 amid falling medical-loss ratios and little consumer or regulatory pushback on cost-control strategies such as narrow networks, tiered copays and high-deductible health plans.
Indeed, the only insurance companies that seem to be stumbling are the co-operative startups funded under the Affordable Care Act. Their mistake, it turns out, was low-balling their policies to gain market share—never a smart idea in a new marketplace where many consumers are price-sensitive and have serious conditions.
The sizable increase in durables and medical devices is harder to explain. A separate Altarum report showed prices in the sector grew just 1.8% last year, significantly lower than the average 6.4% increase in drug prices.
The latest earnings reports from several of the largest publicly traded medical-device companies reveal sales growth hovers around the national average with profit margins shrinking because of increased marketing and administrative costs.
It's getting tougher to make sales out there as hospital officials continue to look for ways to hold down the price of physician preference items like implantable devices. This tougher environment goes a long way toward explaining why the industry is so intent on repealing the medical-device tax.
Policymakers need to review these spending trends closely. An incorrect diagnosis (such as blaming the increase on a surge in hospital or physician services) will lead them to wrong conclusions about where to apply pressure if they want to maintain a moderate pace of health-spending increases like the past four years.
Until now, the focus has been mostly on keeping volume and therefore spending at hospitals and physician offices in check. That approach has largely succeeded.
Moving forward, national policymakers need to focus on holding down the skyrocketing cost of drugs. And state insurance regulators need to ensure that modest increases in service spending, which are reflected in insurance companies' shrinking medical losses and higher profits, lead to lower premiums for employers and individual consumers.
