Years of slow growth in healthcare-care costs may be coming to an end

The national medical bill may be back to growing faster than gross domestic product. After five years of historically slow growth, new data show U.S. health-care spending accelerated significantly in 2014. The analysis, from the Altarum Institute research group and based on preliminary government data, shows health spending increasing by 5 percent last year, compared to 3.6 percent in 2013. If confirmed by the final tally, health-care spending during 2014 would mark the biggest jump since before the recession.

Economists don’t know how much of the recent slowdown was due to the recession and how much came from real changes to the health-care payments and delivery system. Millions of Americans lost their jobs—and their health insurance—in the wake of the 2008 financial crisis and recession. The Affordable Care Act, passed in 2010, introduced some measures to control health-care costs, including penalties for hospitals whose Medicare patients are readmitted within 30 days of a hospital stay.

The jump in health spending for 2014 wasn’t unexpected. Millions of Americans have now gained health insurance through the Affordable Care Act exchanges, expanded state Medicaid programs, and jobs created by employers. “All three together are driving the coverage and presumably the spending,” says Altarum senior economist Paul HughesCromwick. The federal government had anticipated that the spending slowdown would end in 2014, projecting total health care spending growth of 5.6 percent. Official numbers for 2014, tallying everything the government, employers, and individuals spend on health care, won’t be published until the end of 2015.

Aside from the growing number of people with insurance, what’s behind the increase? Drug prices, for one. While medication makes up just about 10 percent of the total U.S. health care bill, costly new therapies to treat diseases such as hepatitis C and cancer have reached the market. A string of blockbuster drugs lost patent protection in recent years, helping to moderate drug costs, but that trend is largely over. “What if indeed there is a big jump in overall health spending, but it’s driven by drugs?” asks Hughes-Cromwick. In his view, that would mean that U.S. efforts to control costs of health-care services—doctors, hospitals, nursing homes—are still working.

One sign that spending on health-care services is part of the equation: hiring. While America’s health-care workforce has long grown faster than overall employment, especially during downturns, that hasn’t been the case in recent years. Since mid-2013, for instance, total job growth in the U.S. economy has outpaced jobs added in the medical industry. But health-care hiring picked up in the fourth quarter of 2014, and January’s preliminary hiring data matched the pace of overall job creation.

Adding jobs likely indicates additional demand for medical care, Hughes-Cromwick says, though it’s not certain: “The health sector is so strange, you never can rule out these extremes, where hiring is jumping and utilization isn’t.”

Total health-care spending is a combination of utilization (how many tests and treatments we use) and price (how much each service costs). Even if the volume of medical care delivered is going up as more people get health insurance, there are signs that providers face pressure to keep the prices they charge in check. A measure of how much hospitals charge insurance companies and the government, included in the Producer Price Index report released on Wednesday, shows that hospital prices actually dropped in January, compared with a year earlier.

“This is absolutely unprecedented,” Hughes-Cromwick says, noting that prices dropped for government payers and increases were historically low for private insurers. Contracts between insurers and hospitals begin at the start of the year. “I think there was tremendous pressure on providers to cut them slack on their pricing.”

It’s too soon to tell whether the deceleration in medical spending over the past few years was a temporary dip born of the recession or genuine progress in taming health-care costs. This might just be the year we find out.

From Bloomberg Business, by John Tozzi, February 18, 2015