Question

The economic impact and the growth factors driving the healthcare industry are

Answer 1

Three factors driving health-spending growth

Jul 30, 2015

MHE Articles, MHE Articles, Business Strategy, Healthcare Reform, Business Strategy

Health spending is projected to grow at an average rate of 5.8% per year—4.9% on a per capita basis—for 2014 to 2024, according to new estimates from the Office of the Actuary at the Centers for Medicare and Medicaid Services (CMS). 

Health spending is projected to grow 1.1% faster than Gross Domestic Product (GDP) per year over this period; as a result, the health share of GDP is expected to rise from 17.4% in 2013 to 19.6% by 2024.

Sean Keehan

These findingsappear as a Health AffairsWeb First article and will appear in the journal’s August issue. Study lead author Sean Keehan, senior economist, CMS Office of the Actuary, and colleagues used actuarial and econometric modeling techniques to model health spending by service, by payer and by sponsor (or source of financing).

Keehan offers the following 3 factors that primarily drive health-spending growth over the entire projection period:

#1. Affordable Care Act’s (ACA’s) major coverage expansions.

#2. Stronger expected economic growth.

#3. Population aging.

“Although projected health-spending growth is faster than in the recent past due to the combined effects . . . it is still slower than the growth experienced over the last three decades prior to this most recent recession,” Keehan, tells Managed Healthcare Executive.

Over the entire projection period, the ACA’s major coverage expansions are projected to reduce the uninsured population by 18 million and people tend to use many more healthcare goods and services when they move from insured to uninsured, according to Keehan.

Read: Are you complying with ACA coverage requirements?

“Based on analysis of 50 years of National Health Expenditure Accounts data, we see a consistent long-term relationship between economic growth—specifically disposable personal income—and health spending although this relationship works with a lag,” he says. “Therefore, health spending growth is likely to accelerate in response to improvements in economic conditions that are projected over the coming decade.”

Finally, during the projection period, population aging is projected to increase health-spending growth because people tend to need to use more healthcare goods and services as they get older, according to Keehan.

After six years of growth averaging 4%, national health spending is projected to have grown 5.5% in 2014 as a result of faster health spending due mainly to ACA health insurance coverage expansions and rapid growth in prescription drug spending.  

“Factors moderating health-spending growth in 2014 include the effects of continued increases in cost sharing requirements in private health insurance plans and near historically low rates of medical inflation,” Keehan says.

After 2014, national health spending is projected to grow 5.3% in 2015 and peak at 6.3% in 2020.

Answer 2

1. Technology. According to MedPAC, technology is credited as having the most significant effect on healthcare spending growth, with studies identifying it as the reason behind anywhere from 38 percent to more than 65 percent of spending growth.

2. Healthcare product and service prices. The level and growth of healthcare prices have a big impact on healthcare spending. Studies have consistently pointed to price growth as the cause of between 10 percent and 25 percent of healthcare spending growth.

3. Market power. Provider market power also drives spending growth. Hospitals, physicians and other providers have been consolidating at a rapid rate, and merging with others can give them greater market power over insurers and more leverage in payment rate negotiations, according to MedPAC.

4. Health insurance coverage. Getting health insurance coverage can potentially reduce patients' incentives to seek the most efficient, lowest-priced care, according to MedPAC. One study of an insurance coverage experiment in Oregon found people randomly selected for Medicaid coverage used 25 percent more services than an uninsured control group.

5. Demographics and patient characteristics. Changes in the age and health status of the population can make a significant difference in healthcare spending; the CBO has identified the aging baby boomer population as a major driver of spending growth.