The large increases in healthcare spending reported recently by the CMS and a new economic survey are sending a false signal.
The era of provider cost constraint hasn't ended.
Only spending on pharmaceuticals is out of control, and that's because of the outrageous pricing policies adopted by most drug companies. This isn't just about Valeant or Turing's Martin Shkreli, who has been branded the Peck's bad boy of pharmaceutical pricing after turning a $13.50 per pill treatment for a rare infection into a $750 per pill blockbuster.
Drilling down into the CMS numbers reveals that drug spending soared 12.2% last year, a rate of increase that has moderated only slightly in 2015, according to the latest reports from the Altarum Institute's Center for Sustainable Health Spending. Hepatitis C drugs, $10,000-a-month cancer chemotherapy treatments, sharp price hikes for sole-sourced generics, biosimilars that are priced only slightly below their brand-name equivalents: The drug industry as a whole has decided to take an Alfred E. Neuman approach to cost control.
Earlier this month, CMS actuaries reported overall spending on healthcare rose 5.3% to $3 trillion in 2014, sending its share of the economy to 17.5%, up from 17.3% the year before. It was the first time healthcare spending grew substantially faster than the rest of the economy since 2009.
Had drug spending, embedded in the overall number, gone up only as fast as, say, hospital spending, that increase would have been only 4.6%. Hold drug spending to the rate of inflation, and overall healthcare spending as a share of the economy would be no different today than it was in 2009.
Despite concerns expressed by the Federal Trade Commission and some healthcare economists that hospital and insurer consolidation would lead to huge price hikes, there is absolutely no evidence in the latest numbers that this is a problem. Hospital spending in 2014 grew at a 5% pace—below the overall number, and barely ahead of the rest of the economy, which grew at a 4.1% rate (the rates are not inflation-adjusted).
And even that differential overstates the case. The other major increase in health spending in 2014, in addition to drugs, came in a category economists call “the net cost of health insurance,” which rose 12.4%. These are the expenses and profits that go to insurers after they've paid all their medical bills.
But we shouldn't blame the insurance industry for their sharp increase in overhead. They absorbed, or were about to absorb, nearly 10 million new members in 2014 through the new insurance exchanges. Many plans lost money on the newly insured, either by low-balling prices for individual plans to attract market share, or underestimating the pent-up demand for services.
That new demand accounted for growth rates in hospital and physician spending that were slightly ahead of the rest of the economy. But that's not likely to last long, the way things are going.
The Obama administration this fall sharply lowered its 2016 expectations for signing up the uninsured. Even if HHS surpasses its 10 million-person enrollment goal, the uninsured rate, which is now down to around 12.5%, will remain much higher than what healthcare economists had expected by this point after the Affordable Care Act's passage.
Next year there isn't likely to be another slew of the newly insured filling physicians' waiting rooms or empty hospital beds. And those who repurchase or switch plans probably will have fewer unmet needs, and actuarially will act more like other healthcare consumers.
Trends in the insurance marketplace also are working to undermine the past two years' rebound in provider revenue growth. An increasing number of consumers are winding up in insurance plans with narrow networks and high deductibles, either because they choose lower upfront premium costs, or because their employers insist on it. This acceleration of consumer-driven medicine—which is the long-sought goal of market-oriented economists and policymakers—will eventually drive down prices.
The latest numbers from the Altarum Institute show healthcare costs decelerating throughout 2015. After peaking at 6.7% in the first quarter of this year—largely because of astronomical drug prices—growth fell to 5.5% in the third quarter.
But there are more storm clouds on the horizon. There are new $10,000-a-month cancer drugs in the pipeline that extend life for a few months. And a new line of very expensive cholesterol-inhibitors have just hit the market.
Congress, despite last week's drug-cost hearing, still doesn't have an agenda for controlling what has become the No. 1 cause of rising healthcare costs: skyrocketing drug prices.