Editor’s note: For more discussion of the latest national health expenditure numbers, see Yevgeniy Feyman’s Health Affairs Blog post.
On December 2, Anne Martin and the actuarial team at the Centers for Medicare and Medicaid Services (CMS) released their estimates of national health spending for 2015. The headline news was that health expenditure growth has increased relative to prior years, and that the health care share of gross domestic product (GDP) hit a high of 17.8 percent in 2015. The annual estimates tell us a lot about growth in spending, sources of funding, and broad categories of use. They don’t, however, tell us much about the level and allocation of benefits from additional spending. Another way to consider the growth in national health expenditures is to see who has benefited from it and how.
Coverage: Expansion at a Deep Discount
One set of beneficiaries of higher health care spending growth in 2015 can be identified quite readily: those who gained coverage through the ACA coverage expansions that took place in 2014 and 2015. Martin and her colleagues estimate that in 2015, the national uninsured rate had declined by 4.9 percentage points and some 23 million more people held insurance coverage compared to 2013. Since people use substantially more services when they are insured than when they are uninsured, covering more people naturally leads to higher overall expenditures.
The growth in expenditures associated with more coverage is entirely consistent with expectations. In 2011, CMS projected that the ACA would lead to an increase in the insured share of the US population from 84.4 percent in 2010 to 91.8 percent in 2015, and that the number of Americans who were uninsured would decline from 48.5 million in 2010 to 26.7 million in 2015. The 2011 estimates were produced before the Supreme Court’s decision in NFIB v. Sebelius reduced the scope of the Medicaid expansion, making direct comparisons between projections and realizations more difficult. With that adjustment in mind, the evidence in Martin et al.’s new paper suggests that the expansions have been very successful relative to earlier predictions. The insured share of the population now stands at 90.9 percent and the number of uninsured has fallen to 29.2 million.
These benefits in new coverage are particularly notable because they came at such low cost. In their 2011 projections, CMS also compared expected future national health expenditures with and without the ACA. They projected that, absent the ACA, by 2015 health expenditures would reach $3.342 trillion dollars, would account for 17.9 percent of GDP, and would be growing at about 5.6 percent per year. As Martin and coauthors’ report indicates, actual expenditures including the cost of the ACA expansions comprised $3.206 trillion dollars in 2014, accounted for 17.8 percent of GDP, and rose at 5.3 percent in 2014 and 5.8 percent in 2015. Put differently, relative to these projections, the ACA’s coverage gains were achieved at no cost to national health expenditures at all. Implementation of the ACA brought virtually all the coverage gains anticipated by CMS back in 2010 at substantially lower cost.
Outcomes: Innovation Accelerates
The single largest source of spending growth in 2015 came from retail prescription drugs, where rapid growth in 2014 followed even faster growth in 2015. The CMS team notes that almost all the growth came from new brand name pharmaceuticals, not repriced generics. In contrast to prior periods, many of the new drugs introduced in the past few years have been very costly and highly targeted at rare and serious diseases.
After rapid innovation in the prescription drug market of the 1990s, new drug approvals slowed substantially in the 2000s. That slowdown in drug approvals, combined with the “patent cliff” where drugs moved from brand name to generic, contributed to the deceleration in the recent growth in national health expenditures. But slower growth in drug spending came at the cost of slower progress in preventing and treating disease. In an effort to pick up the pace of drug introduction, Congress just passed the 21st Century Cures Act, committing billions of dollars in new funding to the National Institutes of Health to spur the development of drugs and to the Food and Drug Administration to speed their approval.
The lull in new drug approvals now seems to have ended. New drug approvals rose to the level of the late 1990s once again in 2014 and exceeded that level in 2015. Prices of several of the newly approved drugs are very high, but for many drugs, benefits are likely to be even higher. The return of pharmaceutical-driven health care cost growth poses challenges for policymakers. Cutting health spending by focusing on waste and inefficiency is relatively painless. But cost increases driven by valuable pharmaceutical innovation will require difficult trade-offs.
Revenue: Where has the money gone?
A third set of beneficiaries of higher health care expenditures are the recipients of those expenditures. After all, health care expenditures by consumers (individuals, businesses, or governments) constitute the revenue of the health care sector. As we’ve recently shown, it’s possible, though difficult, to decompose the main recipients of increased medical service revenue. Our analyses showed that, between 1997 and 2012, the main beneficiaries of growth in health care sector revenues were producers of intermediate products—products used as inputs for final goods and services—and the most highly compensated health professionals were physicians and nurses.
The data sources needed to do a comparable decomposition of 2015 revenues are not readily available. Nonetheless, the general patterns of spending across sectors, including rapid growth in private insurance spending on hospital and physician services, suggest that the distribution of benefits is likely to be similar to that seen in 2012. In 2012, the revenues of health care providers exceeded their expenses by 10.2 percent, with the lowest surplus share in hospitals. Hospitals have high fixed costs and low marginal costs, so increases in revenue from higher utilization, as reported in the Martin et al. study, would be expected to increase their surplus. Consistent with this expectation, hospital operating margins reached a 20-year high in 2012. Spending on physician services also increased much more rapidly than did the supply of physicians, suggesting an increase of surplus in this area, as well.
Matching Benefits and Costs
The annual unveiling of national health spending has no exact analogue elsewhere in our economy. While the Bureau of Economic Analysis develops accounts for all major industries, little attention is paid to the news that the finance, insurance, real estate, rental, and leasing industry’s share of the GDP has increased by 1.2 percentage points since 2008 and now comprises 20.3 percent of the total.
There are very good reasons for the disproportionate attention given to health care spending, but it’s important to recognize the flip side of the spending. Higher health care spending in 2015 generated substantial benefits for the newly insured and for those with conditions that could be treated by new pharmaceuticals. It also generated substantial income for those who produced and supplied health care goods and services.