Much is being made of the increase in U.S. healthcare spending to more than $3 trillion for the first time in 2014, and also of the 5.3% rate of increase, compared to less than 4% per year for four years. These numbers are being watched closely to determine whether the lower trend will persist or whether the 5.3% represents the beginning of a new upward trend, which would cause significant concern throughout the economy (governments, employers, consumers, etc.).
The nation is asking us to improve quality and efficiency at the same time. There are estimates that up to one-third of healthcare expenditures are unnecessary, wasteful or harmful, and there is much evidence accumulating that we can make meaningful improvements. If a significant upward trend in health expenditures continues, we will not have succeeded in our most fundamental tasks. The good news is that there is little in the detail of these numbers to cause concern about new trends and there is every reason to believe that we can meet the challenges before us.
It is important to understand what drives the year-to-year change in healthcare spending. The annual rate of change is the percentage change in the population times the percentage change in utilization times the percentage change in cost per unit of utilization. All of the change in health expenditures derives from these three factors.
Population changes slowly and predictably: births minus deaths, plus the net inflow from immigration and emigration. This has resulted in an increase factor of slightly less than 1% per year.
Progress in improving quality and efficiency simultaneously can be seen in a reduction of utilization as well as curtailing growth in the costs of everything that goes into a unit of service. The recent trend of increases of less than 4% per year relied heavily on improving both utilization and costs (e.g., inpatient utilization per person has decreased). But the Affordable Care Act has created an interesting period of desired upward utilization for those newly insured who had been underserved while at the same time continuing the overall downward pressure on utilization (the overserved). Addressing both improves appropriateness of care and reduces undesirable variation, key twin goals in adding value.
It is important to untangle the numbers to see what is actually occurring. There are now 8.7 million more citizens with insurance than before the ACA. While some were certainly receiving care, mainly on an emergent basis, this represents about 2.7% of the U.S. population. If the utilization of the rest of the population were unchanged from year to year and the newly insured went from zero utilization to a U.S average level of utilization, the overall utilization rate would have increased by 2.7%. Moving from half of the average to the full average would increase utilization by about 1.35%.
The cost of prescription drugs increased at a very significant 12.2% rate. This is more driven by cost per unit than changes in utilization and is an outlier situation that is necessarily receiving much attention. The approximate $32 billion in increased drug costs represents slightly more than a 1% increase in all U.S. health expenditures.
The combination of population change, insuring more citizens, and the increase in prescription drug costs goes a long way in explaining the overall 5.3% increase, with the implication that the rest of the healthcare sector might be continuing as it has in recent years. Further evidence of this is that Medicare costs per person increased less than 2.4% and private insurance costs increased at a rate only slightly more than recent years.
This leaves U.S. healthcare with a certainty, a question and a firm goal. The certainty is that the appropriate pressure will continue unabated to constrain cost growth while improving quality. The question is whether we have reached an inflection point toward an undesirable upward trend. While it is too early to tell, there is no clear and compelling evidence as yet.
The firm goal is to have modest or no increase in health expenditures as a percentage of GDP. This goal was met from 2009 to 2013, but not in 2014. A step-wise increase is perhaps understandable as we absorb the uninsured, but beyond that, improvements in how we approach health and healthcare should be more than enough to counterbalance the aging of the population and all other factors.
Douglas Strong retired in September 2015 after 17 years at the University of Michigan, including nine years as CEO of the UM Hospitals and Health Centers.