Lower utilization dampened health spending growth in 2017

The rate of U.S. healthcare spending growth slowed from 2016 to 2017, driven by reduced use and intensity of hospital care, physician services and prescription drugs, according to the new annual report by CMS’ Office of the Actuary published in Health Affairs.

Total spending hit $3.5 trillion, up from $3.4 trillion in 2016. But spending growth dropped to 3.9% last year, down from 4.8% the year before, despite a slight uptick in prices from 1.3% in 2016 to 1.6% in 2017. The share of gross domestic product spent on healthcare in 2017 was 17.9%, compared with 18% in 2016.

Growth has decelerated from higher rates in 2014 and 2015, when it averaged 5.5%, partly due to the Affordable Care Act coverage expansions. The 2017 growth rate was similar to average annual growth from 2008 to 2013, a period that included the Great Recession and its aftermath. It’s much lower than the average annual rate of 7.3% over the 1998-2007 period.

“This is unquestionably good news and adds to the evidence that we are in a new normal of lower cost growth,” said Andy Slavitt, CMS administrator during the Obama administration and now general partner at Town Hall Ventures. “The very slow per capita increases, particularly in Medicaid and Medicare, may provide evidence that the population health management that’s taken hold since the Affordable Care Act is working.”

In Medicare, per capita expenditures increased at a modest 1.7% pace in 2017, similar to the 1.6% rate the year before. For traditional Medicare, which accounted for two-thirds of the program’s $705.9 billion in spending in 2017, per capita expenditures grew 1.5%, up from 0.9% in 2016.

Per capita spending for Medicare Advantage plans, excluding the effects of the congressional moratorium on the health insurance tax, rose from 1.7% in 2016 to 3.2% in 2017.

In Medicaid, per capita growth decelerated to 0.9% last year, down from 1.2% in 2016. While total federal spending on Medicaid slowed sharply last year, from 4.6% to 0.8%, total state and local spending jumped from 3.6% to 6.4%. That was due to states picking up a larger percentage of Medicaid expansion costs, with states assuming 5% of the cost under the ACA.

“This shows that Medicaid costs are very well-controlled, and should put an end to politically driven talk about how much we need to have block grants and to put up other barriers for people to enroll in Medicaid,” Slavitt said.

The rate of retail prescription drug spending—which made up 10% of total expenditures—slowed to just 0.4% in 2017, down from 2.3% in 2016 and 8.9% in 2015, according to the actuaries’ report. That was the slowest rate of growth since 2012.

The key factors included slower growth in the number of prescriptions dispensed; a continued shift to lower-cost generic products; and slower growth in use of some high-cost drugs such as those used to treat hepatitis C. In particular, 2017 saw a dampened growth rate for pain prescriptions, which could be driven by broad concern about overprescribing contributing to the nation’s epidemic of opioid addiction.

Contrary to widespread belief, the actuaries found that generic drug prices declined, and there were lower price hikes for existing brand-name drugs.

Payers and consumers, however, remain extremely concerned about the cost of drugs. Steve Wojcik, vice president of public policy for the National Business Group on Health, said his organization’s members report that specialty pharmacy costs are the top drivers of rising cost trends.

Hospital spending—which made up 33% of total spending—grew faster than the overall healthcare spending rate, up 4.6% in 2017. That still was less than the 5.6% growth rate in 2016. The actuaries said the deceleration reflected a slowdown in the use and intensity of goods and services. Hospital prices increased 1.7%, up slightly from 1.2% in 2016.

Spending for physician and clinical services, making up 20% of total spending, rose 4.2% in 2017, slowing from 5.6% in 2016 and 6% in 2015. Spending for outpatient care centers outpaced that for physician services.

Private health insurance spending growth slowed to 4.2% in 2017, following a 6.2% rate the year before. This was partly influenced by a slowdown in enrollment growth, from 0.4% in 2016 to 0.2% in 2017.

Household spending, including premiums and out-of-pocket costs, also grew at a slower rate—3.8% in 2017 versus 4.8% in 2016. This was driven mainly by slower growth in out-of-pocket spending, which in turn resulted by slower growth in spending for long-term care, and physician and dental services.

While the overall reduction in intensity and use of goods and services suggests greater use of more cost-effective outpatient care, the new data raised concerns among some observers about people forgoing needed care because of high-deductible plans and other affordability issues.

“To the extent that cost reductions are coming from lower utilization because people aren’t getting needed care, that would be a bad thing,” Slavitt said. “But I suspect a lot of what we’re seeing in this report is better care management and more appropriate sites of care.”

Wojcik found the lower spending growth rate in 2017 encouraging, but said there’s still a long way to go.

“3.9% is better than 4.8% and definitely better than the double-digit inflation of the 1990s,” he said. “But that’s still a faster growth rate than the overall economy and wage growth. So there are still financial sustainability issues.”

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