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For the third consecutive year, national health spending has outpaced economic growth. The latest update from the Centers for Medicare and Medicaid Services (CMS) finds that national health expenditures (NHE) rose 4.3 percent in 2016, 1.5 percentage points faster than growth in gross domestic product (GDP). Although health spending has slowed considerably since 2002, the latest figures confirm that provisions of the Affordable Care Act (ACA) intended to moderate the pace of rising costs in the health system have yet to show a substantial and sustained impact.
Spending trends between private insurance and public programs differ sharply. Comparing per-enrollee expenditure growth to account for fluctuations in enrollment, CMS reports modest growth in Medicare and Medicaid for 2016, at 0.8 percent and 0.9 percent respectively. Private insurance spending grew 5.1 percent on a per enrollee basis in 2016. CMS finds that private insurers had consistently higher increases in spending per enrollee than public programs over at least the past seven years.
Although there are many possible explanations for spending differences, including the ACA’s substantial reductions in the Medicare payment rates for providers, this pattern reveals the breadth of our health spending problem. Limiting payments is not sustainable over the long term without delivery system reforms that promote efficiency. Controlling system-wide costs will require more ambitious efforts on the part of health systems and more aggressive policy changes than have been enacted to date.
The popular press often focuses on a few aggregate numbers when reporting on health spending. The headline this year is health spending totaling $3.3 trillion, or 17.9 percent of GDP. Many stories will also mention that spending grew by 4.3 percent in 2016 before moving to experts who may raise concerns about the estimate or, alternatively, point to progress. Those are all important data points, but they do not distinguish between the growth in spending directly attributable to the health sector and growth due to broader factors.
When considering the growth in total NHE, it is sensible to adjust for population growth and general inflation. By controlling for factors that affect the entire economy, we can more clearly identify cost trends that are associated with the health system itself.
Annual increases in overall population have been fairly steady in recent years, about 0.7 to 0.8 percent a year. Enrollment in private insurance, Medicare, and Medicaid has been more erratic, reflecting in large part ACA changes that have encouraged individuals to obtain health coverage and shifts in coverage due to changes in the national economy, including the deep recession of 2007 to 2009. The CMS update reports health spending per enrollee when discussing spending trends for private insurers, Medicare, and Medicaid.
Medical inflation is consistently larger than general inflation. In 2016, the Consumer Price Index (CPI) increased 1.3 percent, while the medical component of the CPI grew 3.8 percent. Deflating health spending by the CPI roughly corrects for inflationary pressures outside of the health sector.
There are measurement issues that confound an attempt to estimate general inflation excluding medical inflation using the CPI. Because the CPI is intended to measure the prices of goods and services directly purchased by consumers, the CPI medical component accounts only for price inflation affecting out-of-pocket spending, which accounts for only about 10 percent of NHE. An alternative measure from the Bureau of Economic Analysis (BEA), known as the health expenditures price index, is a more comprehensive measure intended to more fully account for the price of health services. In 2014, the BEA index reported a 2.9 percent increase in medical prices compared with 1.3 percent for the overall CPI. However measured, it is clear that medical inflation is substantially larger than general inflation.
The NHE release provides a large amount of data across a number of dimensions. We focus on a comparison of spending growth trends across time for the nation as a whole for public and private sources of insurance coverage.
Aggregate NHE includes investments in physical capital that does not translate directly in into the consumption of health services. Consequently, the release provides an estimate of Health Consumption Expenditures (HCE) which focuses only on spending directly related to the use of medical care by patients. The HCE is the most useful assessment of trends in health spending because it includes out-of-pocket spending by consumers of medical care in addition to what is spent by the primary sources of insurance coverage.
The ACA includes provisions that were aimed at slowing the overall cost growth rate in health care, but the HCE data included in the release show no difference between the overall growth rate of health spending in the period before and after the enactment of the law in 2010.
As shown in Exhibit 1, over the period 2010 to 2016, real (inflation-adjusted) HCE grew at an average annual rate of 2.8 percent. From 2003 to 2010, real HCE grew at an average annual rate of 2.7 percent. Adjusting for population growth, real HCE per capita grew at an average annual rate of 2.0 percent over the period 2010 to 2016, compared to an average annual growth rate of 1.8 percent from 2003 to 2010.
These data do not show a significant change in the pattern of spending on medical care due to enactment of the ACA.
Exhibit 1: Health Spending Growth
Medicare’s nominal rate of spending growth in 2016 was 3.6 percent, well below the overall NHE growth rate of 4.3 percent. After adjusting for inflation, Medicare spending grew just 2.3 percent in 2016, down from 3.7 percent in 2015.
Medicare, like Social Security, is experiencing a surge in enrollment as the baby boomer generation enters its retirement years. That enrollment growth explains much of the growth in program spending each year.
Medicare spending per enrollee has slowed markedly in the years after the 2010 enactment of the ACA. In nominal terms, per-capita Medicare spending rose just 0.8 percent in 2016, down from 2.0 percent in 2015. Inflation-adjusted per-capita Medicare spending actually fell in 2016, by 0.5 percent, after growing 0.9 percent in 2015 and staying flat in 2014.
The post-ACA slowdown is apparent when comparing longer periods of time, as shown in Exhibit 1. In real terms, Medicare spending grew at an average annual rate of 2.8 percent from 2010 to 2016, down from 6.0 percent over the period 2006 to 2010. On a per-capita basis, real Medicare spending fell at an average annual rate of 0.3 percent from 2010 to 2016, after growing at a rate of 3.8 percent from 2003 to 2010.
There are likely a number of causes of the slowdown in Medicare spending in recent years. The ACA included large reductions in Medicare’s fee-for-service payment rates for various providers of medical services. In particular, the law introduced “productivity adjustments” to the updates for institutional providers of services, including hospitals, which lowered payments for these providers relative to prior law. The ACA also reduced payment rates for Medicare Advantage plans.
In addition, as noted in the NHE release, the Centers for Medicare and Medicaid Services (CMS) has continued to implement regulatory changes to control costs, including competitive bidding for durable medical equipment.
The ACA also introduced new Medicare payment programs, including Accountable Care Organizations (ACOs), aimed at bringing more efficiency to the provision of care. However, the savings from these efforts have been modest at best. The Centers for Medicare and Medicaid Services (CMS) recently reported that 31 percent of “shared savings” ACOs kept costs low enough to earn a bonus in 2016, another 25 percent produced savings but not enough to earn a bonus, and 44 percent increased Medicare costs relative to a benchmark level of spending. Overall, with bonus payments factored into the calculation, the ACO program increased Medicare spending by $39 million.
Medicaid costs have risen rapidly in recent years, as shown in the NHE release, but this increase is attributable to enrollment growth from the expansion of the program under the ACA and shifts in the national economy. In 2016, enrollment in Medicaid was 71.2 million people, up from 54.0 million in 2010.
Medicaid spending in real terms grew at an average annual rate of 4.4 percent over the period 2010 to 2016. On a per-capita basis, real Medicaid spending actually fell at an average annual rate of 0.3 percent over that period. From 2003 to 2010, real Medicaid spending grew at an average annual rate of 2.7 percent. On a per-capita basis, real Medicaid spending fell at an average annual rate of 0.6 percent.
Per-person spending on Medicaid is heavily influenced by the characteristics of new enrollees into the program. In recent years, the program has enrolled millions of new beneficiaries who are not disabled or elderly, and thus have far lower annual costs than beneficiaries with those characteristics. The effect has been to slow the growth of per-person spending, even as overall program spending has surged.
Aggregate spending on medical care by private sources of insurance coverage has risen more slowly in recent years than aggregate Medicaid growth and at the same rate as Medicare. Over the period 2010 to 2016, private health plan spending grew at an inflation-adjusted average annual rate of 2.8 percent. From 2003 to 2010, the real average annual growth rate was 2.0 percent. On a per-capita basis, real spending by private health insurance plans increased at an average annual rate of 1.9 percent over the period 2010 to 2016, below the 2.8 percent rate that occurred from 2003 to 2010. Per-capita private plan spending thus slowed down somewhat after the ACA was enacted but remained rapid compared to growth of the national economy.
The Affordable Care Act expanded insurance coverage and took some initial steps to promote more efficient health care, but it did not solve the nation’s health-care cost problem.
The NHE release shows a pattern of increased enrollment in health insurance in recent years, driven by the expansion of coverage under the ACA, demographic change, and shifts in the national economy. Increased enrollment in insurance has driven up overall health spending.
The ACA, along with regulatory changes, have helped to slow Medicare per-person spending growth, and to limit per-capita cost growth in Medicaid. It is a relatively straightforward proposition to impose payment rate limitations in Medicare and Medicaid, while private insurance plans must negotiate contracts with providers of medical care. The ACA imposed large reductions in what Medicare pays hospitals and other providers, as well as Medicare Advantage plans, compared to prior law. In Medicaid, most states tightly control the per-capita payments they make to the Medicaid managed care plans that cover medical services for most Medicaid enrollees. The CMS actuaries who produce cost projections for Medicare and Medicaid have estimated that the large divergence between what private and public insurance pays for services will widen dramatically in coming years as the cuts imposed by the ACA (and by the Medicare and CHIP Reauthorization Act (MACRA) for physician services) compound and grow over time.
While payment rate reductions in Medicare and Medicaid can lower the cost of these programs for federal and state governments, they do not increase the overall efficiency of the health system and may lead, in time, to reductions in the quality of services provided to public insurance enrollees, or to more restricted access to care for those enrollees. Further, regulated cost controls in public insurance do not necessarily lead to cost reductions in private insurance plans, and may drive those costs up further over time.
Slowing the pace of the overall growth rate of NHE will likely require imposing more aggressive cost discipline approaches across the entire health system than has occurred to date. The only way to impose that discipline without harming the quality of care is by increasing the efficiency by which care is delivered to patients. In most sectors of the economy, market incentives drive suppliers of services to become more efficient over time, but those incentives are generally absent in health care.
Actions could be taken to promote less costly, more efficient coverage for millions of workers. The ACA imposed a new tax, known as the Cadillac tax, on high-cost employer plans. An alternative that would impose an upper limit on the tax preference for employer-sponsored insurance has the potential to bring more discipline to a large portion of the private insurance market. However, implementation of the Cadillac tax has been delayed until 2020, and the tax may be repealed entirely before going into effect due to widespread political opposition.
This opposition is short-sighted. If policymakers do not proactively inject more incentives for cost discipline into the system, financial pressures will eventually force changes to occur, one way or another. Those changes might include the gradual shrinking of private sources of insurance, including employer plans, as well as the imposition of more governmental control over prices for services paid by private plans. These controls would be arbitrary and could eventually slow innovation and reduce the quality of services provided to patients.
It would be better if Congress took steps sooner rather than later to provide stronger incentives for cost control throughout the entire health system. A better-designed replacement for the Cadillac tax would encourage firms and workers to migrate into more cost-efficient arrangements. Medicare beneficiaries should have stronger incentives (in the form of lower premiums) to enroll in integrated care arrangements that improve quality and lower costs compared to the unmanaged fee-for-service program. The federal government and states need to coordinate efforts to reduce the costs of caring for frail patients who are eligible for both Medicare and Medicaid.
These are just some of the steps needed to bring health cost growth to a level that is commensurate with growth in nation’s resources. Timely and responsible policies can lead to fundamental reforms in health care delivery that can ensure appropriate, high-value care for future generations.
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