Health-care Costs: Slow (but Steady) Growth Ahead

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As citizens and the media debate the cost and growing pains associated with the Patient Protection and Affordable Care Act (PPACA), Cuckler et al¹ (at the CMS Office of the Actuary) predict that aggregate health-care spending will grow at an average annual rate of 5.8% from 2012 to 2022, outpacing the projected growth rate of the US gross domestic product (GDP) by 1%. In 2022, nearly one-fifth of the GDP (19.9%) will be spent on health care, they estimate. This increase, according to a detailed economic forecast¹ published in the October 2013 issue of Health Affairs, is attributed (in part) to the escalating enrollment in Medicare of the aging baby-boom generation. This population will require more (and more expensive) health-related services. Another factor cited by the authors is the impact of the implementation of the PPACA. By 2022, an additional 30 million people are expected to have health insurance. The analysis predicts that cumulative health spending, by this date, will have increased $621 billion beyond the estimated $2.8 trillion spent in 2012. A healthy dose of optimism factors into the third driver: economic recovery. Cuckler et al predict that as the US economy improves over the next 10 years, more people will have disposable income to spend on prescription drugs and health services. The projections do not include any impact of scheduled Medicare Physician Fee Schedule rate updates under the sustainable growth rate’s formula. The authors presume that Congress will modify these to be less drastic in their effects on health-care providers, starting in January 2014, by adjusting the automatic 24.7% fee reduction. They do, however, include the impact of the US Supreme Court ruling, made in June 2012, that makes the expansion of Medicaid eligibility (under health reform) optional for state governments. The Near Future For 2013, the authors project, total national health spending will be found to have risen at a rate of less than 4%, reflecting consumer/business price sensitivity due to continuing economic sluggishness. Medicare expenses are expected to have increased by 4.2%, slightly less than 2012 growth, and to have been offset by the automatic budget cuts of March 1 (sequestration). Growth in spending by private insurance companies will be seen to have slowed to a projected 3.4%. The initial impact of expanded insurance coverage for an estimated 11 million individuals is the primary reason that the authors predict an increase to 6.1% for the 2014 growth rate. The authors expect a spending increase of 12.2% for Medicaid patients—to reach $490 billion. The increase for patients with private health insurance is estimated at 7.7% for the year. Both increases are attributed to the PPACA. Patients will benefit from a 1.5% decline in out-of-pocket spending due to the law’s coverage and cost-sharing provisions. The authors predict more of the same for 2015: a 6% increase due to the addition of an estimated 8 million new enrollees in health-insurance programs, with the assumption that the economy will grow 5%. With more disposable income available, consumers will spend more on health-care services, the authors project. Annual total health-care spending growth from 2016 to 2018 is projected as moderating slightly (at 5%) as the effects of the health-insurance expansion begin to subside in 2016. The authors believe that health-care spending will be fueled by an improving economy and by increases in disposable income. The increase in Medicare spending is projected at 7.3% per year. Beginning in 2019 and extending through 2022, Medicare spending is expected to increase at a rate of 7.9% (compared with 7.3%, for the three previous years) as the enrollment in Medicare of the baby-boom generation builds. The end of sequestration in 2022 was also factored into the greater growth rate. By 2022, 49% of the nation’s estimated $2.4 trillion health-care cost will be paid for by government agencies. The largest contributor will be the federal government, at an estimated $1.5 trillion. This will pay for growth in Medicare enrollment, expanded Medicaid eligibility, and premium and cost-sharing subsidies available through health-insurance exchanges. Hospitals and Physicians Total hospital spending seems to have reached a plateau, with an annual growth rate of just 4.9% in 2012 (the third year that the growth rate was below the 5% mark). The authors anticipate that it will be even lower for 2013 (4.1%) and in 2014 (4.7%). Sequestration reduced growth in Medicare payments to hospitals by 3.2% in 2013, but the authors predict that newly insured patients will offset lower hospital-payment updates in 2014. For 2015, however, the authors expect growth of 5.6%, increasing to 6.4% in ensuing years. Costs related to coverage of increasingly elderly Medicare patients will result in a 7.8% increase in hospital payments, compared with an estimated annual 5.9% growth rate for privately insured patients needing hospital services. As in the hospital sector, spending on physician services has remained below 5% for several years. The authors cite the economy, the high unemployment rate (and its impact on the number of insured patients), a low inflation rate, and the impact of sequestration on reimbursement for Medicare/Medicaid services. The 2013 growth rate is expected to be 3.9%—a reduction from the 4.6% rate of 2012 and the 4.3% rate of 2011. Physicians are expected to feel an upswing in 2014, a year before hospitals experience a bump in revenue. Growth in spending is predicted to accelerate to 7.1% as a result of services being provided to the newly insured. This group will include a higher proportion of healthier patients who do not require hospital services, but will take advantage of access to physicians and clinics for treatment that they would have forgone, without private insurance. By 2015 and through 2018, the average annual growth in physician and clinical services is expected to be 5.5%. The authors attribute this increase to the PPACA expansion in insurance coverage and to the anticipated improvement in the economy. Growth will rise, for 2019 through 2022, to 6.6% annually, thanks to Medicare payments for care of the baby-boom generation. With insurance making prescription drugs more affordable for many, drug spending is predicted to soar. It will reach 5.2% in 2014 and then climb to 6.5% thereafter—through 2022—fueled by rising prices and utilization. Payors and Patients It is no surprise that growth in private health-insurance spending is expected to accelerate in 2014 (to 7.7%), declining to 6.2% in 2015 and to 5.8% for ensuing years. In 2012, the growth rate in private-health insurance spending had moderated to 3.5%, contributing $813.9 billion to health spending that year. The authors report that out-of-pocket spending reached $320.2 billion in 2012, growing at a rate of 4.1% (compared with 2.8% in 2011). The authors project a more moderate 2.7% growth rate for 2013. By 2022, they expect out-of-pocket expenses to account for 9.1% of total health-care spending; in 2012, patients are believed to have contributed 11.4% of the total. Cuckler and her colleagues warn their readers that their projections and estimates remain subject to substantial uncertainty. They cite lack of historical experience of the impact of many of the health-care reforms being undertaken. The CMS Office of the Actuary does not have a way to predict the future (or the volatility) of the economy—within the nation or globally. Neither does anyone else. Cynthia E. Keen is a contributing writer for Radiology Business Journal.