Higher prices driving growth in healthcare spending

EVEN BEFORE THE COVID-19 pandemic began to overwhelm providers, total healthcare spending in the U.S. was projected to climb at a pretty steady clip.

Researchers at the CMS’ Office of the Actuary last week projected an average annual growth rate of 5.4% from 2019 to 2028, fueled by higher prices.

Prices are expected to increase at an average annual rate of 2.4% over that span and account for 43% of total spending growth. Price growth only accounted for a quarter of total expenditure growth from 2014 to 2018.

The projected 5.4% growth rate—up from 4.5% in 2019—would outpace inflation by 1.1 percentage points, as it has for the last several decades. As a result, the healthcare economy would climb to $6.19 trillion in 2028, accounting for 19.7% of gross domestic product—up from $3.65 trillion in 2018, which was 17.7% of GDP.

“Even without the coronavirus outbreak, the growth trajectory for healthcare spending isn’t going to be bent in the foreseeable future,” said Ge Bai, an associate professor of accounting and health policy and management at Johns Hopkins University. “With the coronavirus outbreak, the trajectory will be boosted instantaneously and keep ballooning as we invest more in national health security.”

While having a larger portion of GDP attributed to healthcare is not necessarily a bad thing, a more concerning issue is the expansion of public spending and the crowding out of private spending in U.S. healthcare, which can lead to suboptimal resource allocation and market distortions, she added.

The government is projected to pay a larger share—nearly half—of the nation’s total health bill by 2028, as baby boomers continue aging into Medicare and the program’s beneficiaries consume $1 out of every $4 spent on healthcare, said Sean Keehan, an economist in the Office of the Actuary and lead author of the study published in Health Affairs.

Enrollment in Medicare is expected to jump to 75 million people by 2028, up from just under 59 million in 2018. Almost 5,000 people will join Medicare each day this year, said Dr. Kevin Schulman, a professor of medicine at Stanford University and the associate chair of its Clinical Excellence Research Center.

“Underneath these projections are important changes in pharmaceutical costs, and increased costs for commercially insured populations,” he said. Those costs will be borne by employers and employees via high-deductible health plans, Schulman added.

Total hospital spending, which accounts for about a third of total healthcare expenditures, is expected to increase at an average rate of 5.9% from 2021 to 2023, up from 5.1% in 2020. Medicare hospital spending is expected to grow at an average rate of 8.1% over that span, up from 7.1% in 2020. That’s mainly pinned on rapid increases in the use and intensity of hospital services for Medicare beneficiaries.

“This is a very big increase,” said Glenn Melnick, a healthcare finance professor at the University of Southern California. “If this is true, it will put increased pressure on the federal budget and likely will increase pressure to reduce payment rates to hospitals under Medicare.”

Like pharmaceutical companies, hospitals have come under fire for their pricing practices as misaligned coverage networks and negotiations between providers and insurers often leave patients in the lurch, spawning surprise billing legislation. There is wide variation in hospital pricing for basic procedures that has little to no connection to care quality.

As it relates to COVID-19, providers will struggle to weather the decline in elective surgeries, which could have a lasting impact on the delivery system, Schulman said.

“Hopefully, this will be a catalyst for some real changes in the market that could change the trajectory of healthcare spending over time,” he said. ●