In the real economy, medical costs are on a sharp upswing.
It’s becoming clear that a brief slowing in the pace of healthcare spending was transitory – more a result of one-time factors that tamped down on healthcare demand rather than any secular change in how medical care is being delivered.
It’s important to distinguish between three common but different ways that most commentators try and gauge whether healthcare costs are on the rise. Either by measuring increases in total healthcare spending, measuring the cost of providing health insurance, or calculating the rise in prices charged for actual medical care.
All three measures are rising, and all three are, of course, interrelated.
Yet on a relative basis, the increases in actual medical charges seem to be growing more quickly than the cost of insurance, or measures of total health spending. This suggests that the real underlying inflation in healthcare has yet to be fully felt.
On the issue of total healthcare spending, it appears that the slowing in total healthcare outlays was short lived, and probably a consequence of temporary factors.
For one thing, a slack economy that left consumers with less disposable income also discouraged many people from seeking medical care.
More important were sweeping changes in the structure of health insurance. The widespread and rapid adoption of high-deductible health plans, which had high out-of-pocket limits, discouraged people from seeing their doctors. These high-deductible plans were around before the ACA. But Obamacare made these very skinny kinds of health plans politically fashionable, and as a consequence, far more prevalent. Insurance constructs that started in the Obamacare exchanges have rapidly diffused across the commercial market as carriers standardized around these new schemes.
Each of these one-time factors is starting to run its course. Medical demand is back on an upswing. People were able to avoid doctors for only so long.
That’s leading to resurgence in healthcare spending.
According to new data released Centers for Medicare and Medicaid Services, which published its projections last week in the policy journal Health Affairs, spending on healthcare is expected to grow at an average annual rate of 5.8 % over the next decade. In the years following the recession, healthcare expenditures grew at historically low rates of around 4%. That slowdown is judged to be over.
These hikes in healthcare spending will exceed even the rosy estimates for growth in the GDP — by 1.1%, according to the Obama estimates. As a result, the share of the economy devoted to healthcare will rise from 17.4% today to 19.6% in 2024.
Yet this focus on the amount of total healthcare spending belies an even more troubling trend in the healthcare sector – the rising cost of the actual medical care.
The medical care index, which is maintained by the Bureau of Labor Statistics, measures these medical prices. It rose 0.7% this summer. This was the “largest increase since January 2007,” the BLS wrote in its report. These are the actual prices being charged for things like tests, treatments, and doctor visits.
In the BLS report, the broadest subset of medical care services grew by 0.9%. It was an unusually steep increase. Medical care service is the largest component of the medical care index. It includes the prices of doctors, hospital care, and other related services. The cost of hospital services alone rose 1.9% in the monthly report.
Moreover, the BLS report may be underestimating medical inflation, since it measures the consumer price index. As Kelly Evans explained on CNBC, the CPI captures mostly out-of-pocket healthcare costs, being an index of what consumers themselves are paying. By comparison, the gauge used by the Federal Reserve — the price index for personal consumption expenditures — covers “all goods and services consumed by households regardless of who paid for them.”
As a result, healthcare services make up roughly 20% of core PCE, because it covers the consumption of healthcare paid for by somebody else (like Medicare, Medicaid, and employers). By contrast, healthcare services account for only about 8% of the core CPI. So the measures of CPI are missing a lot of price and spending data.
Even as the cost of insurance as well as total spending on healthcare each rise, the more worrisome trend is the rising prices for actual medical services. The only reason insurance costs aren’t increasing more quickly to reflect these higher prices is that people are purchasing less healthcare. In effect, we’ve been getting less healthcare for a greater share of our money that we’ve been spending on it.
All of this suggests that the real inflation in the cost of medical care hasn’t fully flowed into the price of insurance or the measures of total spending, despite the recent increase in these other figures. There is still a lot of room to run. If the increases in the price of medical services continue, and medical demand gets back to historical norms, total spending on healthcare can start to rise even more quickly.
These rising prices are indisputably a result, in part, of the consolidation underway in healthcare delivery, where doctors and hospitals are binging on mergers.
Hospital mergers, for example, have been on a record pace. There were 95 hospital mergers in 2014, 98 in 2013, and 95 in 2012. Compare that with 50 mergers in 2005, and 54 in 2006. As I noted in the Wall Street Journal, cheap debt and Obamacare’s regulatory framework almost guarantee more consolidation.
Of even greater concern is the consolidation of individual doctor practices into large medical groups that are often owned or controlled by local hospitals.
The consolidation of doctors into regional, hospital-based health systems reduces (and in some cases eliminates) any real local competition between different medical providers. This blocks the ability of health plans and other purchasers to contract with providers on the basis of the quality or the cost of the care they deliver.
All medical care is local. Once a single system is able to lock up the delivery of most of a region’s medical care, continued price hikes will be inescapable.
That’s exactly what’s unfolding. These rising prices are just beginning to show up in the aggregate measures of total health spending.
If demand for healthcare services starts to return to historical norms, then the rising price of medical care will translate into even bigger increases in the cost of healthcare coverage. Premiums follow costs. The recent pop in the government’s aggregate measure of total healthcare spending may be just the beginning.
You can follow Dr. Scott Gottlieb on Twitter @ScottGottliebMD