By ETIENNE DEFFARGES
The official 2017 statistics from the U.S. Department of Health and Human Services (DHHS) are out, and there are some good news: The annual growth rate of health care spending is slowing down, and is the lowest since 2013 at 3.9%—it was 4.3% for 2016 and 5.8% for 2015. The bad news is that our health care cost increases are still well above inflation, and that we spent $3.5 trillion in this area, or 17.9% of GDP. Americans spent $10,739 on health care in 2017, more than twice as much as of our direct economic competitors: This per capita health care spending was $4,700 in Japan; $5,700 in Germany; $4,900 in France; $4,200 in the U.K.; $4,800 in Canada; and an average of $5,300 for a dozen such wealthy countries, according to the Peterson -Kaiser health system tracker from the Kaiser Family Foundation, and OECD data. Spending almost a fifth of our GDP on health care, compared to 9-11% for other large developed economies (and much less in China), is like having a chain tied to our ankles when it comes to our economic competitiveness.
To answer these questions, we need to look in more detail at the largest areas of health care spending in America, and at the recent but also longer term spending trends in these areas. Using the annual statistics from the DHHS, we can compare the growth in spending in half a dozen critical health care categories with the growth in total spending, and this for the last three years as well as the last decade. Over the last decade, since 2007, these costs grew 52% in aggregate (from $2.3T to $3.5T) and 41% per capita (from $7,630 to $10,740).
1) Private Health Insurance costs ($1.2T in 2017) grew 4.2%, 5%, and 6.9% in 2015, 2016 and 2017 respectively. This is faster than total health care costs, in part due to the strong average cost increases that followed the implementation of the ACA (“Obamacare”) marketplaces and subsidies. On the other hand, over the last decade, private health insurance costs only grew 40%, less than total health care spending. So we should be able to anticipate some stability here, but no significant change in the business models used and reductions of patients’ out of pocket cost, co-pays, deductibles, etc.
2) Medicare costs ($706B in 2017) grew 5.1%, 3.5% and 3.5% in 2015, 2016 and 2017 respectively. Over the last decade, they grew 37%. Good news, Medicare cost increases lag total health cost increases. Bad news, the 5.1% cost increase in 2017 is high. What will we have in the next 5-10 years? Unfortunately, Medicare costs will likely increase faster than total health costs, due to the aging of the U.S. population, and this trend will continue at least until the last “Baby Boomer” reaches the Medicare eligibility age of 65.
3) Medicaid costs ($582B in 2017) only grew 2.9% in 2017 and 4.2% in 2016. On the other hand, with the ACA’s Medicaid expansion, they grew 9% in 2015 and 11.8% in 2014, as several new states expanded Medicaid under the Obamacare guidelines. This will be repeated in 2019, following the November 2018 Midterm elections: Three newly elected Democratic governors promised to bring Medicaid expansion to their constituents. This has already been done in Maine, with Kansas and Wisconsin next. Plus, the citizens of Idaho, Nebraska and Utah will also get Medicaid expansion, following the success of ballot initiatives during the recent Midterms. In total, around 800,000 people are poised to gain access to Medicaid for the first time in these six states. This is very good news for national health coverage statistics, and of course for the new enrollees, but it also means that Medicaid costs are likely to increase at a strong rate in 2019 and 2020. The impact on overall health care spending will be mitigated, though, by fewer visits to expensive emergency departments from people without health insurance. From a patient’s standpoint, this will be the strongest positive impact of the ACA in 2019.
4) Hospital spending ($1.1T in 2017) and Physician and Clinical Services costs ($694B in 2017) have grown in line with the overall health care costs, in recent years as well as over the last decade. With increased merger activity among health care delivery providers, their pricing power increases with industry concentration, and it is unlikely that we will see spending in these areas grow much more slowly than total health costs.
5) Administrative costs, like a snake in the grass, represent the biggest outlier in U.S. health care costs. What good can come out of excess administrative costs? Employment! Yes, but this is not the type of employment that adds to our economic competitiveness…The numbers in this area are tragic: $259B in 2017, with well above average cost increases of 6.5%, 5.6% and 5% in 2017, 2016 and 2015 respectively—and a whopping 65% over the last decade. We spent more on administrative costs than the United Kingdom spends on total health care. Let’s do some quick math here: The dozen large developed economies mentioned above spend an average of 2% of total health care costs on administration, versus 7.4% in the U.S. All other things being equal, if we too spent 2% on admin. costs, we would save $190 billion per year, enough to insure pretty much all our uninsured at today’s costs. Unfortunately, this sad state of affairs is the reflection of the enormous complexity of our health care system, and as long as we cannot surmise the political will to do a complete overhaul of how we provide health care to our citizens, this will continue. A potential sign of improvement in this area will be when technology innovations lead for the first time to a demonstrated ability to cut health care costs. Thus far, and unlike in any other industry, the opposite has proven true, and administrative costs have grown hand in hand with ever more complex electronic health records, patient accounting systems, the use of big data and other IT innovations. Complexity reigns supreme in U.S. health care, and even Silicon Valley is unable to do anything about it.
6) Drug Costs: I have saved this most often mentioned culprit in health care costs for last. And yes, drug spending over the last decade has outpaced total health care spending in America, principally in the 90s and early 2000s, where it grew in double digits annually. Americans spend about twice as much in this area than residents of other rich developed countries. Surprisingly, however, spending on prescription drugs in pharmacies and other retail outlets only grew at 0.4% in 2017, at $333B, and 1.2% in 2016. After increases of 9% in 2015 and 15% (!) in 2014, could galloping pharmaceutical prices be behind us? To have more certainty in this area, one would have to be able to track the aggregate costs of drugs used in hospitals (not reported in the DHHS statistics), often very expensive ones, in part because these costs are well reimbursed by both private and public payors. Because it has become such a political rallying cry, we could very well see some bipartisan legislation, not just to contain but reduce prescription drug costs in our country. We all know what should be done: Eliminate the absurd clause within Medicare Part D that does not allow Medicare, the largest purchaser of drugs in the country, to negotiate prices directly with pharmaceutical companies; and allow the import of lower-priced drugs from reputable countries such as Canada, Germany and Japan. Any partial movement in this direction, such as the recent proposal by the Trump administration to allow the import of lower cost pharmaceuticals in certain areas for Medicare, would likely lead to a reduction in prescription drug costs for U.S. patients.
Author of “Untangling the USA: the Cost of Complexity, and What Can Be Done About It,” Etienne Deffarges has counseled, created, and invested in countless organizations during his professional life as a management consultant, business executive, and entrepreneur.