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The Philadelphia Inquirer


Surge In Health-Care Spending

June 13, 2014

By Yevgeniy Feyman

In a revised estimate of gross domestic product, the Bureau of Economic Analysis (BEA) recently announced that the economy actually contracted by 1 percent in the first quarter of 2014. This comes as no great surprise: Output growth, after all, tends to slow during winter months, inventories accumulate due to harsh weather, and private investment falls.

But there's more to these numbers than mere bad weather.

When BEA released its "advance" estimates last month, which showed real GDP growth at 0.1 percent, one particular number stoked the health-care blogosphere into a frenzy:

The eye-popping annualized, inflation-adjusted 9.9 percent surge in health-care spending (specifically, personal consumption expenditures). At the time, this represented a major category keeping GDP growth positive, contributing 1.1 percentage points to economic output. And if true and sustained, such spending growth could foreshadow the end of American health care's period of "Great Moderation," the era of low cost growth we've seen for some years.

Do such developments portend a return to high medical cost growth? Perhaps, for unless the Affordable Care Act's (ACA) cost-control measures work unexpected miracles, a return to (at least moderately) high cost growth seems inevitable.

Dissect the stunning 9.9 percent figure and other insights emerge.

For one, increased spending was to be expected, since the ACA rollout expanded the number of individuals with insurance. A recent report from the Altarum Institute also estimated that from February 2013 to February 2014, health-care spending grew nearly 7 percent (significantly higher than its estimates for prior years).

If the spending uptick was caused by the newly insured using services appropriately, rather than from price inflation (medical cost growth has remained very low), then this would be far from a bad thing.

That said, there were also reasons to think the 9.9 percent figure was overstating the real increase.

First, advance BEA estimates are routinely revised downward. Second, as former Office of Management and Budget director Peter Orszag pointed out, for these numbers to hold water, productivity in the health-care sector - as employment in health care didn't see a similar jump - would have had to more than double over just a few quarters.

Do the revised numbers confirm such predictions?

Health-care spending was indeed down, though not significantly: Real, annualized health-care outlays grew 9.1 percent, still well above the estimates by Altarum (7 percent) and the Centers for Medicare and Medicaid Service (6.1 percent).

Still, drawing face-value conclusions would, once again, be misleading. Another revision is expected in late June; this one will likely push down the health-care number further still (likely pushing down GDP in the process, too).

But there is also at least one important quirk in the data suggesting that even if the number remains high, it may not signal a change in trend, but rather a one-off increase.

Among those who obtained insurance on ACA exchanges, 6.7 million were deemed eligible for Medicaid coverage. Yet unlike those with private coverage, the way that spending gets counted for this latter group doesn't completely represent utilization per se.

Many (if not most) of the newly covered Medicaid beneficiaries will receive care through "managed Medicaid" - typically private HMOs paid by states and the feds to provide care to the Medicaid population. Generally, these plans are paid a per-member-per-month (PMPM) "capitated" rate: a flat payment, per enrollee, to manage care for beneficiaries, thereby transferring risk away from the state to the insurer.

Here's the kicker: When health plans receive these payments, the dollars are immediately counted as part of health-care personal consumption expenditures, regardless of whether any services are used. This means it is possible, and even likely, that at least some of the observed increase in utilization is being driven by new enrollees who are not receiving medical care. The relatively stagnant health-care workforce (1.4 percent growth March 2013 to March 2014), stable hours, and low inflation make it ever more plausible that the increase in "utilization" may not, in fact, stem from an actual increase in utilization. Other factors also bode well for the health-care slowdown. For instance, Medicare cost growth, which is more insulated from economic effects, continues to crawl at historic lows.

Of course, all this does not preclude a return to high cost growth going forward. Indeed, it has only been for the past decade or so that the gap between medical and general inflation growth has narrowed.

As the economy continues recovering, the Fed will raise rates. Inflation expectations will climb. And, as people start actually using their newly minted ACA plans, either hours or the workforce must expand - with prices likely to follow. While the ACA's cost-control measures may work, don't bet on a continued great moderation of U.S. health-care costs.

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