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HEALTH SPENDING — A Dissenting View: U.S. Health Spending Growth Will Continue To Moderate



January 17th, 2008

Having reviewed the latest report on national health spending in 2006 (Health Affairs, Jan/Feb 2008) from the Centers for Medicare and Medicaid Services (CMS) and Paul Ginsburg’s commentary (“Don’t Break out the Champagne: Continued Slowing of Health Spending Growth Unlikely to Last”), I want to offer a dissenting view. Though I do not have the benefit of Ginsburg’s Community Tracking Study, I see a very different picture than Paul does, and a more durable downtrend in spending growth. How long it will last is anyone’s guess, but another year or two of moderate health spending growth is entirely possible, as well as the prospect of at least a fourth year of flat gross domestic product (GDP) percentage (at 16 percent).

Hospital admissions and procedure growth continued to slow in 2007, while the viability of physician-owned ambulatory enterprises was badly damaged by the Deficit Reduction Act (DRA) payment changes for imaging, endoscopy, and other high-growth services. The viability of freestanding ambulatory surgery centers, which steadily took share from hospitals over the previous two decades, was damaged by a significant reduction in Medicare payment rates. Today, many of these physician-sponsored imaging and surgical facilities are for sale to their hospital neighbors at fire-sale prices. Sales of imaging equipment, not only to freestanding facilities but to hospitals, have fallen dramatically in the wake of the DRA. 

Further, after a one-time spike in prescription drug spending from the Medicare Modernization Act (MMA) in 2006, prescription drug sales slowed yet again in 2007, according to IMS Health, whose principal business is tracking these trends. The secular trend of this decade has been reduced Food and Drug Administration (FDA) approvals of new molecular entities and a continuous erosion of patent-protected drugs due to patent expiry and available generic substitutes. Generic prescriptions exceeded 60 percent of total prescriptions in 2007. A recent Wall Street Journal analysis suggested that pharmaceutical sales may actually decline from 2011 to 2012 due to an exceptional expiry schedule in that year (including Lipitor, the industry’s top seller). 

Even the twin shining stars of the biotech industry, Amgen and Genentech, have been afflicted by pipeline problems and payment restrictions on established specialty pharmaceuticals. The nation’s pharmaceutical industry is in deepening economic difficulty, and restructuring of the faltering research enterprise, reductions in force both in sales and research, and leadership changes have all ensued. This storied industry’s long dark night is far from over. 

On the hospital side, as Ginsburg correctly notes, capital spending continues at a record pace, as do hospital profits, which reached a record $35.5 billion in 2006. Hospital admissions growth has flattened, however, despite increased capacity, and many hospital systems are in the process of recreating, at between $600,000 and $1 million a bed, excess capacity they spent more than a decade shedding. Much of the hospital capacity expansion on the ambulatory side, as Ginsburg noted, was a tardy response to the explosive freestanding facility growth of the previous decade. Though some of this represented catching up to demand, much of the hospital ambulatory expansion will also be surplus because to the impending shrinkage of freestanding competitors. This will create opportunities for health plans to leverage that excess capacity into lower provider payment rates for ambulatory services.

Hospitals are also seeing a non-incremental departure of their baby-boomer admitting physicians, and as their patients have been transferred to younger practitioners, hospital admissions have been reduced because those physicians cannot cover their office activity and manage large numbers of hospitalized patients at the same time. The community physician time crunch has, in turn, facilitated the growth of hospitalist coverage of inpatient units, and more conservative (e.g. professional) medical management. I expect both ICU admissions and length-of-stay to decline as well, as intensivist coverage of ICUs grows, facilitated by remote monitoring technology. 

Volume of cardiac services, hospitals’ most profitable service, continued to decline in 2007, not only coronary bypass graft surgery (continuing a decade-long trend), but, strikingly, angioplasty volume as well. Sales of stents, which soared during the previous decade with the introduction of drug-eluting stents, have fallen almost 20 percent in the past eighteen months, damaging the earnings and stock prices of companies dependent on stent sales. Large parts of the medical device and product industry are in something approaching recession, with no sign of an immediate trend reversal. 

The late 1990s upsurge in health costs was driven by three factors: rising hospital admissions, rising prescription drug sales, and rising diagnostic procedure volume. For different reasons, all three of these growth factors are in remission today. If health costs as a percentage of U.S. GDP breaks out in 2008 from its four-year plateau at 16 percent, it will be because of the denominator (e.g. a recession), not a resurgence of health spending. 

Any recession (which since I’m not an economist, I’m powerless to predict) would negatively affect consumers’ discretionary health care use because of spreading household cash flow problems (a major contributor to recent bad-debt growth in the hospital sector). 

If a recession does occur, its first manifestation in the health sector will be a return to near-double-digit growth in Medicaid spending, followed by Medicaid and Medicare provider payment reductions, to balance state and federal budgets. Medicaid spending actually fell in 2006 for the first time in program history (an artifact of MMA’s shifting drug spending to the Medicare program). Whatever the fate of health reform, providers and suppliers to the health care industry are facing a very tough environment as this decade draws to an end. No one is drinking champagne at our house, but a return to double-digit health cost growth appears to be a long way off.

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1 Trackback for “HEALTH SPENDING — A Dissenting View: U.S. Health Spending Growth Will Continue To Moderate”

  1. Health Care BS - WILL HEALTH CARE SPENDING REMAIN FLAT?
    January 18th, 2008 at 4:24 pm

1 Response to “HEALTH SPENDING — A Dissenting View: U.S. Health Spending Growth Will Continue To Moderate”

  1. RobertBurney Says:

    One semantic quibble: It was healthcare expenditures that soared in the 1990s, not healthcare costs. The cost of an aspirin or an appendectomy may have risen then also, but that was not the subject of this essay.
    This is an important point, because the costs of individual healthcare services have been totally ignored amid concerns over healthcare expenditures. A missed opportunity.

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