2014 National Health Spending: The Great Moderation Likely Is Not Over

Jeff Goldsmith
Two weeks ago, the Office of the Actuary at the Centers for Medicare and Medicaid Services (CMS) released their 2014 US health spending estimate showing the highest national health spending growth rate since 2008 — 5.3 percent. The question on everyone’s mind: is this the end of the Great Moderation? In my view, the answer is “no.”

The headline rate news for 2014 masked an interesting fact: CMS revised their estimate of spending growth for 2013 to 2.9 percent, by far the lowest rate of national health expenditure growth since Dwight Eisenhower’s presidency, years before the advent of Medicare and Medicaid. Despite the first installment of a significant coverage expansion mandated by the Affordable Care Act (ACA), core health spending growth in 2014 remained at close to record lows: hospital spending (almost a trillion dollars) grew at 4.1 percent and professional services (about $800 billion) at 4.4 percent. These two categories of spending amount to nearly 59 percent of total national health spending.

Take out the effects of the coverage expansion, population growth (+0.7 percent), and inflation (1.6 percent), and core health system spending growth remains at close to a dead stop. Hospital spending growth in 2014 is second lowest in 20 years, and about half the rate of growth of a decade ago. And as Altarum Institute’s November 2015 health care pricing survey shows, both hospitals and physicians face the worst pricing pressure ever recorded.

Impact Of The ACA
Looking just at the sources of double digit growth in spending in 2014, the Affordable Care Act looms large. The sharpest spike was an 18.8 percent increase in the federal share of Medicaid spending, a direct result of the thwarted (by the Supreme Court) partial federalization of the program at the core of the ACA. Medicaid enrollment grew 13.3 percent in 2014, to nearly 66 million.

One cannot imagine a more fortuitous time for expanding coverage than in Year 6 of a sustained pause in cost growth. One suspects that at the depth of the country’s next recession, Medicaid enrollment could easily top 80 million (that is, one in four Americans). This could pose a significant fiscal challenge to federal as well as state budgets. Any acceleration in cost growth for Medicaid (2014 “growth” was actually -2.0 percent per capita) would only worsen the fiscal stress

By contrast, private insurance coverage rose only 2 million—or 1.2 percent—confirming some earlier indications that the vast majority of the ACA’s coverage expansion came from Medicaid (+7.7million). While private insurance per capita spending growth doubled inflation, at 3.2 percent, it is still near record lows. The biggest challenge for both private and public payers in 2014 was prescription drug spending, which grew at 12.2 percent driven in large part by a single drug, the Hepatitis C drug Sovaldi, the most significant blockbuster drug in more than two decades. This rate of increase is unlikely to be repeated in 2015.

Government administrative costs grew at 10.7 percent (from a $36 billion base), clearly ACA driven (though this category includes spending for the Department of Defense and Veterans Health Administration). Finally, the net cost of health insurance—the spread between collected premiums and paid out medical spending—grew at 12.4 percent from a much larger base of $173 billion, a rate of increase also unlikely to be repeated in 2015.

Medicare Spending
Some have questioned whether alternative payment methods or other payment policy changes have impacted Medicare spending. There was, in fact, a worrisome reacceleration in Medicare per capita spending in 2014 (to 2.4 percent, the highest since 2011). But this is still less than a percentage point above the inflation rate and below historical averages.

Some moderation in Medicare cost has been attributed to efforts by CMS to reduce hospital readmissions. The agency estimated that there were about 150,000 fewer Medicare readmissions in 2012 and 2013, the first two years of the program, than for the two prior years. However, there is strong circumstantial evidence that this reduction may have been materially assisted by a sharp rise in observation stays that are not coded as hospital admissions.

As for alternative payment models, though CMS has claimed $441 million in savings in 2014 from the Medicare Accountable Care Organization (ACO)/Shared Savings Programs, their largest initiative, subsequent analysis by Kaiser Health News revealed that CMS used “Lake Wobegon” accounting to come by this estimate. If one takes into account the amount by which 45 percent of ACO’s exceeded their spending targets and the amount of bonus payments to those that did beat their targets, the program cost CMS $3 million in 2014, rather than saved money. If one further adds the billions in costs ACO’s incurred to set up and operate their models, the likelihood is that the society is still several billion in the red from these programs. Perhaps ACOs will generate documentable net savings to Medicare in future years.

The Bottom Line
A $42 billion increase in total health spending in 2014 in a $3 trillion health system bought us a 20 percent reduction in the number of uninsured and an effective cure for a dreaded disease: Hepatitis C. Factoring out population growth and inflation, that’s a pretty good deal. We will look forward eagerly to the 2015 estimates, continued moderation in cost growth, and a second wave of reductions in uninsured Americans.

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