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CMS Study Finds Health Spending Growth Rate Remains Low for Third Consecutive Year

Health Affairs published a recent study from the Office of the Actuary of the Centers for Medicare and Medicaid Services, and the investigators found that total spending on health care in the United States was $2.7 trillion in 2011 and grew 3.9% from 2010 to 2011. This rate of growth has remained at this level for three consecutive years and is relatively low in comparison with health spending trends in the recent past. Additionally, health care spending rose at roughly the same rate as nominal GDP—a congruity that caused the share of the national economy devoted to health care to remain at 17.9% in 2011.

Notably, the CMS study found that personal health care spending accelerated slightly from 3.7% to 4.1% between 2010 and 2011. The authors cite utilization and intensity of services as chief reasons for the increase in growth in personal health care spending as the economy recovers from the recent recession and more Americans gain private health insurance coverage.

Impact of the Recession

The recent recession was the most severe and prolonged since the Great Depression, and one of its greatest impacts was the loss of insurance coverage, which strongly contributed to slower growth in national health expenditures. In 2009, 3.8 million more people became uninsured, and another 2.2 million joined their ranks in 2011. As a consequence, the health care sector experienced record-low growth in personal health care spending (3.7%) in 2010, as well as the first decline ever in measured non-price factors, such as use and intensity of services.

The recession also changed the balance in health care spending among different sectors of the economy. In 2007, U.S. households contributed the largest portion of health spending (29%), followed by the federal government (23%), businesses (23%), and state and local governments (18%). In contrast, the federal government’s share of spending had risen 5% and accounted for 28% of the total in 2011. This increase was largely due to the increase federal financial assistance to states for their Medicaid programs. Yet, spending in other sectors fell, with household spending at 28%, businesses at 21%, and state and local governments at 17%.

The Affordable Care Act

While the implementation of the Affordable Care Act (ACA) has begun, some of the most prominent elements of the law will not take effect until 2014. Overall, the provisions that have gone into effect have not had an effect on aggregate health spending. Yet, some provisions of the law that have already taken effect have had some perceptible impacts on health spending. The provision requiring that family coverage be extended to dependents through age 26 added an estimated 2.7 million dependents to private insurance coverage, which increased employer-sponsored insurance spending and moderated the increase in per enrollee cost of employer sponsored insurance.

With regard to prescription drugs, the ACA lowered spending by increasing rebates from prescription drug manufacturers for drugs used by Medicaid beneficiaries in fee-for-service arrangements and extended rebates to Medicaid managed care plans. At the same time, the ACA also increased prescription drug spending in Medicare by offering a 50% discount on drugs for beneficiaries whose out-of-pocket spending reached the “doughnut hole” coverage gap. This provision of the law both decreased the amount that beneficiaries spent on prescription drugs and increased use of brand name drugs in Medicare in 2011.

The ACA’s medical loss ratio provision required private health insurance plans to spend at least 80% of premiums on medical services, or provide rebates to beneficiaries. This plank of the law resulted in an increase in spending on benefits as a share of premiums for some plans in 2011. 

Medicaid

Both enrollment and spending growth slowed for Medicaid in 2011. From 2010 to 2011, spending growth decreased from 5.9% to 2.5%, and enrollment growth fell from 4.9% to 3.2%. The ongoing economic recovery contributed to both of these trends, as Medicaid is a countercyclical program with enrollment increases during recessions. In addition, Medicaid spending per beneficiary decreased 0.9% in 2011, both as a result of enrolling children and healthier adults and cost containment measures.

Medicare

In 2011, Medicare spending increased 6.2%, a rise from 4.3% growth in 2010. This trend resulted from a one-time increase in spending for skilled nursing facilities, faster growth in spending for physician services, and acceleration in Medicare Advantage spending. Per beneficiary spending growth also increased from 1.8% in 2010 to 3.6% in 2011. As the oldest members of the baby-boom generation became eligible for the program, enrollment reached 47.4 million—a 2.5% increase from 2010 enrollment. Prescription drug spending in Medicare Part D decelerated somewhat as a result of generic prescribing. Yet, the ACA provision closing the “doughnut hole” coverage gap likely caused an increase in the use of brand-name drugs.

Spending by Service Type

When assessing spending by health care sector, the growth in hospital spending was slight. The number of inpatient days declined 1.1%, following a 1.6% decline in the previous year, and the number of outpatient visits increased 0.7%, also after a decline of 1.5% in 2010.

Private health insurance spending on hospitals accelerated in 2011 as plans’ enrollment increased. However, per beneficiary growth in these plans hospital spending slowed to 4.3% from 6.0% in the previous year, potentially a result of the enrollment of young adults age 26 and under through the ACA. Growth in Medicaid hospital spending declined appreciably from 7.6% in 2010 to 2.4% in 2011. This deceleration was as consequence of the expiration of temporary federal support for states’ Medicaid programs and the states’ persistent fiscal pressures. Individuals’ out-of-pocket spending on hospital services grew at a faster pace in 2011, as more individuals faced higher cost-sharing requirements in private health insurance plans.

Spending growth in physician and clinical services increased to 4.3% in 2011, up from 3.1% in 2010. Nevertheless, spending in this area remained low in comparison to average annual growth of 6.1% from 2002 to 2008. Reduced growth in the prices of these services was offset by factors such as increased use and intensity of services.

Spending on prescription drugs grew at a faster pace (2.3%) in 2011, rising from a very low rate of 0.4% in 2010. The average annual growth rate from 2000-2010 was considerably greater (7.8%). The acceleration in 2011 was partly a result of an increase in the prices of brand-name and specialty drugs. At the same time, a reduction in growth in the overall number of prescriptions and an increase in generic prescribing served to temper growth in prescription drug spending.

Spending for private health insurance premiums and for health benefits both grew at a rate of 3.8% in 2011, leaving the net cost ratio (the difference between premiums and benefits as a share of premiums) for private health insurance unchanged at 12.3%. Also, spending growth in benefits per enrollee decelerated to 3.2% in 2011 from 4.6% in the previous year. This trend likely results from many healthy young adults under 26 gaining dependent coverage through the ACA, as well as an increase in enrollment in consumer-directed health plans. Enrollment in these plans has increased 23% on average per year since 2008, reaching 17% of covered workers in 2011. These plans usually have higher deductibles and cost sharing.

Out-of-pocket consumer spending increased 2.8% in 2011, slightly above the previous year’s figure (2.1%). Yet, this increase remains below the 4.7% average annual increase from 2002-8. Again, this trend reflects greater cost sharing in group health insurance plans, as well as an increase in the number of people without insurance.

Summary

The low growth rate in health spending in the United States remained steady from 2009-2011, likely resulting from decreases in insurance coverage and reduced resources to pay for health care during the recent recession. Yet, growth in the intensity and use of services has increased, and many dependents under age 26 gained insurance coverage through the ACA in 2011. It remains unclear whether the growth rate in health spending will return to pre-recession levels with a continued economic recovery and further implementation of the ACA in the coming years.

Prepared by John Connolly, 1/16/13

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