Beware of Contemporary Health Spending Trends: Prepare for Change

The landscape of health care spending is shifting rapidly, bringing challenges and opportunities for consumers, providers, and policymakers alike. As costs continue to rise and new financial models emerge, individuals and organizations must brace for significant changes in how health care is accessed, delivered, and paid for. From increasing insurance premiums to evolving government policies, understanding these trends is essential for making informed decisions about personal and institutional health expenditures. Now more than ever, it’s crucial to stay ahead of the curve and adapt to the dynamic nature of contemporary healthcare spending.

In this commentary, I analyze an article published in Health Affairs, which focuses on US health cost increases, and provide my perspective on how these health cost increases impact clinical pathways, oncology, and more. There is a unique and timely opportunity to address concerns or gaps in care financing while improving clinical patient care.

Overview: Rising Coverage and Soaring Costs

For some, the good news from the CMS data review overall was that the insured population reached 92.5%, boosted by the Affordable Care Act (ACA) marketplace and employer-sponsored insurance. In fact, other sources confirm that self-funded employer health plans grew at the expense of fully insured group health plans. In 2024, fully insured plans now cover only about one-third of the self-funded plan population.

For most, the bad news was that health spending in the US increased by 7.5% to $4.9 trillion in 2023. According to the CMS report, the overall cost increase was driven by an 11.5% rise in private health insurance spending and an 8.1% increase in Medicare expenditures.

Additionally, hospital care and prescription drug claim costs also saw significant growth year-over-year.

Insurance: Medicare

Medicare spending (which accounted for 21% of national health care expenditures) reached $1.0 trillion in 2023—an increase of 8.1%, following 6.4% growth in 2022. Importantly, this faster growth was driven by a turnaround in traditional fee-for-service spending growth from a decline of 1.4% in 2022 to an increase of 1.7% in 2023. At the same time, Medicare Advantage private plan spending continued to experience rapid growth (increasing 14.7% in 2023, down from 15.7% growth in 2022). It accounted for 52% of total Medicare expenditures in 2023 (up from a 39% share in 2019).

Insurance: Private Health Plans

Spending for commercial private health insurance reached $1.5 trillion in 2023 (a 30% share of total national health spending) and increased 11.5% from its 2022 level. This rate of growth not only was faster than the 6.8% increase in 2022 but also marked the highest growth rate since 1990.

The robust growth in 2023 was driven by increased enrollment in Marketplace and employer-sponsored private health insurance plans, strong underlying growth in spending for goods and services, and significant growth in the net cost of insurance, which includes administrative costs, taxes, fees, and net underwriting gains and losses. The net cost of private health insurance increased 12.5% in 2023 and accounted for 10.3% of overall private health insurance spending. Member (patient) contributions are shifting by category but are growing overall due to net cost increases year-over-year.

Provider: Hospital Care

Spending for hospital care reached $1.5 trillion in 2023 (31% of total health spending) and increased 10.4% compared with growth of 3.2% in 2022. The growth rate in 2023 was the fastest since 1990.

The acceleration in 2023 was driven by strong growth in hospital spending by private health insurance (from 8.0% in 2022 to 13.0% in 2023) and Medicare (from 1.5% in 2022 to 6.0% in 2023).

Provider: Physician and Clinical Services

Spending for physician and clinical services reached $978.0 billion (20% of total health care expenditures) and increased 7.4% in 2023, which was faster than the growth rate of 4.6% in 2022. Expenditures for independently billing laboratories also experienced faster growth in 2023.

Growth in 2023 was driven by non-price factors (which include use and intensity of services), whereas price growth remained low, at less than 1%.

Spending growth for physician and clinical services accelerated for three of the four major payers: private health insurance, out-of-pocket (member, patient) spending, and Medicare. This faster growth occurred in part because spending on traditional fee-for-service Medicare went from a decline of 1.4% in 2022 to an increase of 1.7% in 2023.

In terms of health care services, hospital care had the largest growth increase, with a 10.4% increase in 2023 compared with 3.2% in 2022. "For physician and clinical services, spending increased 7.4% in 2023 compared to growth of 4.6% in 2022, and these increases were primarily attributable to growth in non-price factors, such as the use and intensity of services," wrote coauthors.

Provider: Retail Prescription Drugs

Spending on prescription drugs was also up, growing 11.4% in 2023 following growth of 7.8% in 2022. A breakout category driving rapid growth in the use of antidiabetic drugs contributed to this increase.

Prices only increased 0.6% in 2023, compared to 0.5% in 2022, so as the price remained steady, cost acceleration can be attributed to increasing use and intensity, seen mostly through private health insurance and Medicare. The rise in out-of-pocket (patient) spending and a severe flu season were key factors in these plans.

Shifting Costs and Coverage: The Impact of Government and Private Health Plan Dynamics

At face value, the numbers provided by CMS show that as government programs like Medicare or Medicaid grow in population or dollars spent, cost-shifting onto commercial plans occurs. For example, if year-over-year program growth in costs decreased, there was a corresponding increase in commercial cost growth. The 2023 3.4% cost increase difference partially explains the faster rate of cost growth by private businesses than healthcare overall. Downstream cost-sharing in private insurance is reflected in growing out-of-pocket member costs and flat reimbursement growth overall to providers of care or drugs.

This population coverage increases shown in private health plans can be attributed mostly to strong growth, particularly in 2022 and 2023, which was driven by increased enrollment in ACA marketplace plans—a government-structured risk program primarily as a result of enhanced subsidies made available by the American Rescue Plan Act of 2021 and renewed under the Inflation Reduction Act (IRA) of 2022.

Of note, Medicaid enrollment experienced enrollment decline in 2023, mainly because states resumed the redetermination of Medicaid eligibility after the end of pandemic-era coverage protections (also referred to as “unwinding”). The extra individual health subsidies are set to expire at the end of 2025. Still, state and local government health spending ($761.3 billion) also exhibited nearly double-digit growth in 2023 compared with 2022. Many covered by Medicaid moved into ACA state plans for 2024. The state portion of Medicaid payments constituted the largest portion of total state and local government health expenditures (37%) in 2023.

Despite population shifts across government-funded programs, national health expenditure (NHE) numbers remained stable, showing little change. However, another factor in overall plan cost acceleration was faster growth in state and local government contributions to employer-sponsored private health ACA insurance premiums (a 28% share), which increased 9.0% in 2023, following half that growth in 2022.

The share of the economy devoted to health care in 2023 was about the same as in 2019. The NHE share of gross domestic product (GDP) returned to 17.6% in 2023, which was about the same as in 2019 when it was 17.5%. During the 2020-2023 period, health spending and GDP grew at about the same rate: 6.6% for NHE and 6.5% for GDP.

On average during 2020–2023, health care spending and overall economic growth increased 6.6% and 6.5% per year, respectively. As a result, the share of the economy devoted to health care in 2023 (17.6%) was about the same as in 2019 (17.5%). This relationship is similar to the recent pre-pandemic period, 2016–2019, when health spending and GDP grew comparably (on average, 4.4% and 4.2%, respectively), and the health care share of GDP was relatively stable. Although there is uncertainty about the future, expectations are that the traditional economic and demographic drivers of health spending will lead to the return of health care accounting for a larger share of the economy.

For providers in care areas requiring higher service intensity or costlier therapies, the effect of plan costs on reimbursement has resulted in greater administrative burdens, slower payment, or higher-risk (value-based) contracts with third-party payers (pharmacy benefit managers [PBMs], third-party administrators [TPAs]). An example of this effect can be seen in oncology, along with some other specialties in 2024, such as endocrinology, diabetology, and immunology.

Clinical pathways and related care journey mapping or clinical guidelines remain important tools for all stakeholders to assure the opportunity for clinically efficient (cost, care, quality) patient care. What has emerged is a trend in commercial private health plans to carve out or not cover select therapies or medically unnecessary care from coverage provisions. This puts patients, providers, manufacturers, and plan sponsors in a confusing, complex, and inefficient insurance market driven by third party contracted vendors. The result is little to no collaboration, accountability, nor engagement by plan sponsors as the primary payor in US health care to remain steadfast in using solutions that meet their member needs.

The Uncertain Future of Health Care Costs and Coverage

Reflecting on the trends in overall economic and health sector growth during 2020–2023 reveals a divergent year-to-year pattern, but on average, their growth was similar. An example of government program impacts was federal funding related to the COVID-19 pandemic and Medicaid versus ACA private insurance enrollments.

Increased cost shifts from decreased federal reimbursement onto private sector plans have continued. Federal savings have continued to increase private sector health costs impacting population enrollments due to changing options, select coverage carve-outs or no coverage provisions, and increased out-of-pocket (OOP) patient costs depending on plan design.

Access, as viewed in plan enrollments, appears to be less of an issue, but most view ACA plans as minimalist. Despite more plan access, coverage may decline for specific care. Despite inflation pressures in 2021 and 2022, GDP experienced strong, nearly 1% growth year-over-year, with economy-wide prices increasing rapidly in both years. These trends reversed again in 2023 when health care spending grew, but GDP growth was slower. More importantly, there was a rapid acceleration in non-price factors, such as the use and intensity of services and goods consumed, as the insured share of the population reached a historic high in 2023. That trend continues in 2024, while predictions for 2025 are uncertain due to changes in presidential administration and Congress.

The share of the economy devoted to health care in 2023 was about the same as in 2019; during the 2020-2023 period, health spending and GDP grew at about the same rate. It is expected that 2024 will be similar, but predictions for 2025 are unknown at this point due to changes in presidential administration and Congress.

The resulting stability of GDP and NHE into 2025 does allow all key stakeholders to reexamine the fundamentals of health care and collaboratively determine the best rapid path forward for 2026-2030. The calendar timing will require aggressive collaborations, frequent collaborative discussions, and new thinking around the economic factors that are once again influencing the reality of care availability and quality.

Clinical pathways alone will not solve the patient care gaps or problems. How, where, and when they are used within private and government sector plans is critical to solving those issues. Through independent party-facilitated collaborations among private plan sponsors and manufacturers, progress can be quickly achieved toward embracing providers’ and patients’ issues, including the broader inclusion of stakeholders once a clinically efficient framework is developed. Jumping ahead to contracting or larger multi-stakeholder short-term efforts has not worked to allow scaling of sustainable, real-world based change to occur.

Reference

Martin AB, Hartman M, Washington B, Catlin A. National health expenditures in 2023: faster growth as insurance coverage and utilization increased. Health Affairs. Published online December 18, 2024. Accessed January 6, 2025. doi:10.1377/hlthaff.2024.01375