US Healthcare Spending Increases 3.7% to $2.8 Trillion in 2012
Since 1960, researchers from the federal government have tracked healthcare spending in the United States. With that data available, economists today can analyze the factors that have led to slowdowns and increases in expenditures. They have found that health spending as a percentage of gross domestic product (GDP) stabilizes 2 to 3 years following a recession or economic downturn and then increases if the economy improves.
That trend continued in 2012 when healthcare spending reached a record $2.8 trillion, an increase of 3.7% from the prior year, according to the Centers for Medicare & Medicaid Services (CMS). However, because the economy grew at a faster rate, healthcare spending accounted for 17.2% of GDP, down from 17.3% in 2011. Results were published on the CMS website and in the January issue of Health Affairs.
It was the fourth consecutive year of spending growth between 3.6% and 3.8%, low by historical standards but consistent with previous findings during times of anemic economic growth. The Bureau of Labor Statistics contends that the most recent US recession officially began in December 2007 and ended in June 2009, although the unemployment rate remains high and wages for most people have been stagnant. With finances tight and people fearful about job prospects, they are less likely to spend money on doctor visits or other healthcare-related expenditures.
“What we can see is that growth in health spending is cyclical and is related to economic growth,” Anne B. Martin, lead author of the study and an economist in the CMS office of the actuary, said in an interview with First Report Managed Care. “Our historical analysis shows there is a lagged relationship between economic recessions and faster growth in health spending. Since we are in this modest recovery, we are seeing this continued slow growth. This is indicative of that lagged effect. It is a longstanding relationship between economic growth and health spending growth. We are not convinced that this relationship has been broken.”
In other words, it is too soon to predict if the slowing growth in healthcare spending will continue when the economy improves. It is also unclear if transformations in the healthcare payment and delivery models will play a role in lowering spending. The most recent information available is from 2012, when only a few of the provisions of the Patient Protection and Affordable Care Act (ACA) had been enacted.
Ms. Martin said that the introduction of the medical loss ratio in 2012 reduced spending on the net cost of private health insurance. Under the new rules, insurers are required to spend at least 80% of the premiums they collect on medical care. If they fail to do so, they must provide rebates to customers. However, the ACA provisions enacted in 2010, 2011, and 2012 included children up to 26 years of age being allowed to remain on their parents’ insurance plans and the dissolution of a longstanding policy that allowed insurers to deny coverage based on preexisting conditions. Those programs and other expanded coverage led to spending increases.
“Overall the impact [of the ACA on health spending] was minimal,” Ms. Martin said. “On net there was a very small impact because right now we have yet to see the main provisions even start.”
Previous research also found that the ACA has not had much of an effect so far on healthcare spending. In April 2013, researchers from the Kaiser Family Foundation, Altarium Institute, and the International Health Economics Association developed a statistical model based on 1965 to 2011 data from the CMS office of the actuary and 2012 estimates from Altarium. They mentioned that economic factors accounted for 77% of the low growth rates of the past few years, while health system changes such as healthcare delivery reforms and increased cost sharing could be having some impact as well. From 2009 to 2011, health spending increased by an average of 3.9% per year, the lowest rate since the federal government started tracking the information in 1960.
“Most people, if you did a good job, you would say there is clearly an effect here,” Thomas Getzen, PhD, executive director of the International Health Economics Association and a study author, said in an interview with First Report Managed Care. “Whether it is 77%, 50%, 83%—you cannot be that precise. You just cannot…You want to be a little cautious there. I would not want to have it be nailed to 77%. Is the recession a major factor slowing down the rise of healthcare costs? Yes, definitely. And that means that somewhere in the future, we are going to see an uptick. Will it be next year or the year after, and how big will that uptick be? That is harder to say.”
Based on their analysis of nearly 50 years of information, the researchers said that the following factors were “highly predictive” of healthcare spending growth: (1) inflation in the current year and the prior 2 years; and (2) growth in real GDP in the current year and the prior 5 years. They wrote that “there is a very strong statistical link between business cycles and inflation and national health spending,” although they added that it is important to look at several years of data before coming to any conclusions.
“What we have found in the past is that it takes at least 5 years for the effect of a significant recession to kind of pass through healthcare,” said Dr. Getzen, a former Temple University professor who published his first health economics research paper in 1985. “When a recession comes, it effects things for a long time. It effects people’s decision making. It effects [health] plan structures. It effects pharmaceutical companies’ pricing decisions. All those things actually depend upon decisions that are made 1, 2, 3, 4, sometimes many years ago. The whole healthcare economy moves slowly and adjusts slowly.”
For 2012, the spending growth was primarily due to a 4.9% increase in hospital services and a 4.6% increase in physician and clinical services. Spending on nursing home care and prescription drugs both increased at a low rate. Several branded drugs such as atorvastatin, clopidogrel, and montelukast sodium lost patient protection in late 2011 and 2012, leading to an 8 percentage point increase in the share of dispensed prescriptions that were generic. From 2009 to 2011, the generic dispensing rate increased by 3 percentage points or less.
“That is something that is unique for 2012,” Ms. Martin said. “With the absence of many new blockbuster drugs, we do not see this happening this big anytime soon. There have been drugs that have gone off patent in recent years, but none had an effect as large as [in 2012].”
Households accounted for 28% of healthcare spending in 2012, including out-of-pocket payments and contributions to private health insurance premiums and contributions to Medicare via payroll taxes and premium payments. The federal government accounted for 26% of spending, private businesses accounted for 21% of spending, and state and local governments accounted for 18% of spending. See Table (below) for highlights from the 2012 National Health Expenditures.
With the introduction of health insurance exchanges and the expansion of Medicaid in several states this year, millions more people are expected to have insurance. People are now required to have insurance or pay a tax, although the penalties for 2014 are only $95 per adult and $47.50 per child for a maximum of $285. There is some trepidation that young adults and healthy people may choose to pay the tax, which is significantly less than the cost of insurance. If the exchanges are filled with mostly older, sicker people, premiums would likely rise and health costs would increase.
In September 2013, economists from the CMS office of the actuary released a report that estimated that the ACA would reduce the number of uninsured people by 30 million and increase health spending by an average of 0.1% per year through 2022. They projected that healthcare spending will increase by 6.1% this year because of the increasing number of people with Medicaid or private insurance and will increase an average of 6.2% from 2015 to 2022. By 2022, the United States is expected to spend more than $5 trillion on healthcare, according to the CMS economists.
“What I see so far is the cost of healthcare is still going to go up, and it is still going to go up faster than other parts of the economy,” Dr. Getzen said. “However, that rate of increase is probably slowing in moderation. It may go to 20% of [the] GDP, maybe a little higher, but eventually it will stabilize.”
