Health-spending pace expected to pick up

Federal report says economy, expanded care to fuel 6% yearly rise through ’23

Thursday, September 4, 2014

WASHINGTON -- The nation's respite from troublesome health care inflation is ending, the government said Wednesday, in a report that renews a crucial budget challenge for lawmakers, taxpayers, businesses and patients.

Economic recovery, an aging society, and more people insured under President Barack Obama's health care law are said to be driving the long-term trend. The health law allows Americans in most states to get guaranteed coverage either through a commercial health plan or through Medicaid.

Projections by nonpartisan experts with the Health and Human Services Department indicate the pace of health care spending will pick up starting this year and beyond. The introduction of expensive new drugs for the liver-wasting disease hepatitis C also contributes to the speed-up in the short run.

The report from the Office of the Actuary projects that spending will grow by an average of 6 percent a year from 2015-2023. For the five years through 2013, annual growth was below 4 percent.

"We are not projecting that growth will get back to its rapid pace of the '80s and '90s," when inflation rates were 7 percent or more, said Sean Keehan, a senior economist who worked on the report.

Long term, much of the growth will come from Medicare and Medicaid, which now cover more than 100 million people.

The two government programs will drive costs from 2016-2023, with average annual increases of 7.3 percent and 6.8 percent, respectively. For Medicare, the increase is partly due to the retirement of the baby-boom generation, while Medicaid will see higher use of services by elderly and disabled beneficiaries.

Many Americans also are gaining coverage through Medicaid under the health care law.

From 2013 to 2015, the new report says, federal spending on Medicaid will increase 27 percent to $323 billion, from $254 billion. In those years, it said, Medicaid spending by state and local governments will rise 12 percent, to $218 billion from $195 billion.

The federal government will initially pay all the costs resulting from the expansion of Medicaid eligibility in states that choose to cover certain childless adults with low incomes. States will have to pay some of the cost for new beneficiaries who could have qualified for Medicaid under old eligibility rules.

"Additionally," the report said, "some large employers of low-wage employees will elect to no longer offer health insurance to their employees by 2016. As a result, a portion of these affected employees will qualify for, and enroll in, Medicaid."

Overall, the United States is expected to spend more than $3 trillion on health care this year, far more than any other economically advanced country. Yet Americans are not appreciably healthier, and much of what they spend appears to go for tests and treatments of questionable value, studies have shown. Fraud also siphons off tens of billions of dollars a year.

Because health care spending is so high, shifts of a couple of percentage points have significant economic consequences. Health care inflation has recently been in line with overall economic growth, keeping things manageable.

As spending rebounds, health care again will start consuming a growing share of the economic pie, crowding out other priorities. From 17.2 percent of the economy in 2012, health care is expected to grow to a 19.3 percent share by 2023, the report said.

"The period in which health care has accounted for a stable share of economic output is expected to end in 2014, primarily because of the coverage expansions" under the health care law, it concluded.

While Obama's Patient Protection and Affordable Care Act is an immediate trigger for rising costs, the analysts who produced the report said it is not the only factor. Others include a recovering economy and an aging population. Traditionally, the state of the economy has been the strongest driver of health care spending.

The report estimated that 9 million uninsured people gained coverage this year as the health care law's coverage expansion got underway, and another 8 million will be added next year.

More people insured translates into higher demand for medical services and more spending, so White House claims of dramatic savings from the health law were always questioned by some. But the fiscal doomsday warnings from the law's detractors have not materialized, either.

Part of the reason seems to be a push-and-pull effect within the health overhaul. Obama's insurance expansion increases spending, but Medicare cuts under the same law help keep other costs down. Congress also reinforced Obama's Medicare cuts with a round of its own during recent budget battles.

In the report, the analysts said they did not see much evidence that payment changes encouraged by the health law are having an effect on costs. Medicare is experimenting with how it pays hospitals and doctors to reward efficiency while maintaining or improving quality.

The report, which was published online by the journal Health Affairs, also predicted that the federal, state and local government share of health care spending will keep steadily rising, from 44 percent in 2012 to 48 percent in 2023. The share of costs covered by businesses, meanwhile, is expected to decline from 21 percent to 19 percent.

Keehan noted that rising use of generic drugs, increasing price pressure on hospitals and doctors, and the growing popularity of high-deductible health plans, which force consumers to pay more out of pocket for medical care, will restrain health spending.

Other experts believe changes in the way care is delivered are beginning to have an effect as well. Insurance companies are increasingly rewarding medical providers who deliver better-quality, more efficient care rather than those who simply do more procedures.

These are all hopeful signs, said Larry Levitt of the Kaiser Family Foundation, a nonprofit that analyzes health policy and is not affiliated with the Kaiser Permanente health plan.

Like many experts, Levitt said policymakers must work to further slow the rising health care costs, which continue to take a larger share of workers' pay.

"The fact that health spending is expected to grow slowly doesn't help someone whose paycheck is growing even more slowly," Levitt said. "Now is not the time to take the foot off the brake."

Information for this article was contributed by Ricardo Alonso-Zaldivar of The Associated Press; by Noam N. Levey of the Tribune Washington Bureau; and by Robert Pear of The New York Times.

A Section on 09/04/2014