Employer-sponsored healthcare spending reaches record high

Healthcare spending has outpaced gross domestic product growth over the last five years, reaching an all-time high in 2017, according to a new report.

Put simply, it's the prices, according to the Health Care Cost Institute's annual breakdown of the cost and utilization of services for those with employer-sponsored plans published Tuesday.

People are essentially paying more for the same amount of care. Despite utilization remaining relatively flat, spending grew, albeit at a slower rate from 2016 to 2017. Average usage across all sectors only grew 0.5% from 2016 to 2017 but spending rose 4.2% while prices jumped 3.6%. Spending per person grew 4.6% from 2015 to 2016.

Total annual per-person spending has increased 16.7% from 2013 to 2017, rising from an average of $4,834 in 2013 to $5,641 in 2017. That is an average annual increase of 3.9% compared to GDP's 3.1% average. That $5,641 is the highest mark since HCCI began reporting this data in 2009.

"These prices march on, and everyone has been programed to expect it," said Glenn Melnick, a healthcare finance professor at the University of Southern California who has studied the impact of consolidation across his state. "If we don't disrupt this, it will continue."

Outpatient spending grew at the fastest clip from 2016 to 2017, rising 5.1%. Prices jumped 5.7%, while utilization declined 0.6%. The increase was driven by spending on outpatient surgeries and emergency room visits.

While the number of outpatient surgeries declined by 4% from 2013 to 2017, price growth drove an overall spending increase of 14% over that period. Prices for emergency room visits rose 24% and usage increased 10% over that five-year span.

Procedures like diagnostic ultrasounds that were mostly performed in a doctor's office are now frequently delivered in hospital-owned outpatient settings, said John Hargraves, senior researcher and a co-author of the report. This dynamic could change if the proposal for site-neutral payments prevails, he said.

"It comes down to a pricing issue and outpatient was a high-growth area," Hargraves said. "Overall, this is the second year in a row we saw over 4% spending growth—$5,641 of spending per person is the highest number we have seen. It seems like it will continue to go up."

Professional services spending increased by 4.2% from 2016 to 2017, while prices grew 3.5% and utilization ticked up 0.6%. Spending was driven by a 45% increase in spending for administered drugs, despite a 12% decline in utilization. Notably, the report does not factor in manufacturer drug rebates and discounts, which means that increase does not reflect what was actually paid.

Inpatient spending rose only 2.4% amid declining admissions, while prices increased 3% and usage fell 0.6%. That increase was driven by rising prices for medical and surgical admissions.

Prescription drug prices rose 1.4% from 2016 to 2017, marking the lowest annual growth over the past five years. Still, spending grew 4.7% while utilization increased 3.3%. Continued growth in point-of-sale prices contributed to an overall spending increase of 29% from 2013 to 2017.

HCCI researchers didn't drill down into what caused the price hikes, but healthcare consolidation is inextricably linked, industry experts said.

The share of U.S. physician practices owned by hospitals or systems increased from 27% to 48% from 2011 to 2016, according to Richard Scheffler, a health economics and public policy professor at the University of California at Berkeley who has also studied the impact of consolidation across California.

That led to a 9% price increase in specialist outpatient procedures and a 5% hike in primary-care outpatient procedures, he said.

"I would call this one of the most significant changes in the healthcare delivery system over the last decade," Scheffler said.

Some of the price increases stem from facility fees, which are higher reimbursement rates meant to account for a hospital's overhead. They are also influenced by market clout and brand power, he said.

Much of the consolidation goes unchecked because health systems incrementally acquire physician groups in small transactions, remaining under regulators' radar, Scheffler said.

Health systems will continue to buy up medical groups, a trend that is likely to translate into price increases as insurers are forced into "all-or-nothing" contracts, Melnick said.

"As volume goes down, it doesn't matter because these systems will raise prices, and health plans have to have them in their network," he said. "If they don't have them in network, providers will get emergency patients and consumers are left with full-bill charges."

If physicians are employed by larger systems, it is often easier to refer patients to specialists and facilities within the organization's network even if prices are higher because of the existing IT infrastructure, Melnick added.

Site-neutral payments would help, but it would be a drop in the bucket because powerful systems can raise prices elsewhere, he said.

Capped out-of-network emergency care payments would be a more meaningful policy solution, along with eliminating all-or-nothing contracting, Melnick said. Hospitals could be put into cost-related tiers where the consumer would have pay more out of pocket for higher-cost providers, somewhat similar to reference pricing, he said.

"That would force price, quality and service competition," Melnick said.

Employers are trying to regain some control as prices swell. They are carving out narrow networks that promote the use of lower-cost services and have implemented high-deductible health plans that shifted more of the cost burden to employees.

Amazon, Berkshire Hathaway and JPMorgan Chase have formed a joint venture to try to better control costs. Healthcare providers in New Jersey created a similar coalition.

"We will likely see more attempts," Hargraves said.

According to the HCCI report, more people are seeking mental healthcare, which aligns with the increasing scope of the opioid epidemic. However, many behavioral health patients are being treated in the emergency department, which typically isn't best-suited for those services.

Substance use inpatient admissions increased 18% from 2013 to 2017, which coupled with a 39% rise in prices, increased spending by 64%.

Mental healthcare spending rose 20% over that five-year span as usage increased 6% and prices increased 14%.

"The tricky thing with mental health services is figuring out the appropriate sites and levels of care," Hargraves said.

Also of note, more than 40% of 19- to 25-year-olds had no claims for any healthcare services or prescription drugs in 2017, according to the report. Just 15.8% of those in the 55 to 64 group had no utilization. As expected, those with one or more chronic conditions accounted for the bulk of healthcare spending.

HCCI analyzed data from about 4 billion claims of more than 40 million individuals. Claims data come from four of the largest health insurance providers in the U.S.—Aetna, Humana, Kaiser Permanente and UnitedHealthcare—representing about 26% of the employer-sponsored insured population. Although UnitedHealthcare recently announced that it will no longer participate in 2018, meaning that the current data can be used through 2022.

"We are actively looking for new data contributors," Hargraves said.