The last two years have seen two notable events for the U.S. health care industry. In 2014, the implementation of the Affordable Care Act (ACA) led to the largest expansion of health insurance coverage since 1965, and in 2015 the Medicare and Medicaid programs reached their 50th anniversary. These two important milestones provide an opportunity to reflect on the significant changes that have taken place in the nation's health sector over the last half century.
Since 1960, there have been dramatic changes in how health care is provided, consumed, and financed. Using data from the National Health Expenditure Accounts, the Centers for Medicare and Medicaid Services Office of the Actuary recently explored the broad trends and specific eras that have marked these changes, as shown in Table 1. This analysis, "History of Health Spending in the United States, 1960-2013," is available on the CMS website.
This post discusses some of the major factors that have influenced health spending over the last five decades. Variations in health care prices, in the utilization of goods and services, and in the programs and resources that pay for care have had a substantial impact on national health expenditure trends. Going forward, these factors are anticipated to continue to affect health care spending.
Table 1
Health Care Prices
Over time, the prices for health care goods and services have been influenced by numerous factors, including, but not limited to, changes in technology, legislative and regulatory action, economy-wide inflation, consumer demand, and provider supply. The growth in prices for personal health care goods and services averaged 4.7 percent between 1961 and 2013, faster than the average growth in economy-wide prices (as measured by the GDP price index) of 3.5 percent over the period. The year-to-year differences in personal health care and economy-wide price growth reflect excess medical inflation, which has varied significantly over time. During periods of strong economy-wide price growth, health care inflation also tends to be high, largely reflecting the strong growth in prices for the underlying inputs used to produce health care goods and services (such as wages, medical products, and equipment).
During the 1960s and early 1970s, personal health care prices increased at a relatively modest pace, with growth averaging 2.1 percent between 1961 and 1965 and 5.1 percent for 1966 through 1973. This growth was only slightly faster (less than 1 percentage point) than GDP price growth and was impacted by the Economic Stabilization Program that froze prices, wages, salaries, and rents for the entire economy from 1971 – 1973 and for the medical sector through 1974.
The removal of these controls and high energy prices contributed to rapid price growth in the years that followed. During the 1974 to 1982 period, health care prices increased on average 9.7 percent per year, compared to 7.7 percent for GDP prices.
Health care price growth then moderated somewhat over the next decade, increasing 5.7 percent per year over the 1983 through 1992 period, similar to the growth for 1966 through 1973. This reflected slower economy-wide price growth; increased awareness of costs by consumers, employers, and governments; and increased provider competition. Still, the growth rate for health care prices outpaced that for economy-wide prices by over 2 percentage points during the period 1983-1992.
Since 1992, economy-wide inflation has remained low and contributed to price growth for health care goods and services remaining below 4.5 percent every year. Additionally, from 1993 through 1999, average growth in health care prices was just 2.5 percent per year (close to growth of 1.8 percent in GDP prices) as enrollment in HMOs and other managed care plans increased dramatically, resulting in pre-negotiated prices that reflected significant discounts.
However, two factors led to faster health care price growth from 2000-2002, which averaged 3.2 percent per year and outpaced GDP price growth by over 1 percentage point. First, individuals demanded less restrictive health care plans during this period in response to the rise of tightly managed care plans in the 1990s. Second, prescription drug price growth was faster due in part to a large number of new blockbuster drugs that were introduced to the market in the late 1990s.
Over the last decade, health care prices have increased at lower rates. During 2003 through 2007, personal health care prices grew at about the same rate as economy-wide prices, increasing 3.2 percent compared to 2.7 percent for the GDP price index. In more recent years (2008-2013), health care prices rose more slowly, increasing at an average annual rate of 2.2 percent, but they still outpaced prices for the overall economy, which grew 1.6 percent per year. These recent lower growth rates reflect slow growth in the prices of inputs used to produce health care, the impact of the 2007-2009 recession, and lower payment updates for public programs as a result of legislative or policy decisions.
Non-Price Factors
Health care spending trends are also influenced by non-price factors, including changes in the population (both the number of people and their age and gender mix) and in the use and intensity of services. Growth in non-price factors was strongest during the following eras:
- 1961-1965 (pre-Medicare and Medicaid),
- 1966-1973 (coverage expansion and growth in utilization),
- and 2000-2002 (managed care backlash and public payer changes).
A common theme over the three eras was the expansion and increased generosity of health insurance coverage.
Changes in the total population and its age and gender mix affect both aggregate health spending growth and the mix of goods and services consumed, as well as the distribution of programs and payers that pay for care. Since 1960, growth in the U.S. population has remained relatively stable, averaging 1.0 percent per year. Over that time, however, the age profile of the nation has varied considerably.
In 1960, children (aged 0-18) made up 37 percent of the population, while working-age adults (aged 19-64) and the elderly (aged 65+) accounted for 54 percent and 9 percent, respectively. In 2013, those shares were 25 percent for children, 61 percent for working-age adults, and 14 percent for the elderly. Not surprisingly, as the population has aged, the consumption of such services as hospital, home health, and nursing home care has grown while payers such as Medicare and Medicaid have increased as a share of spending.
Additional utilization of health care goods and services over time has stemmed from increased coverage (both in terms of access to care and generosity) through private health insurance expansion and the implementation and expansion of Medicare, Medicaid, and other government programs, along with greater resources to pay for care. During the 1961 -1965 era, non-price factors accounted for three quarters of personal health care spending growth and increased at an average annual rate of 6.2 percent. Greater use of health care goods and services during this era was due in part to continued expansion of private health insurance coverage.
With the implementation of the Medicare and Medicaid programs, the 1966-1973 era experienced even faster growth in non-price factors of 6.9 percent. When both programs started in 1966, 18.9 million individuals enrolled in Medicare and 4 million in the Medicaid program. The 2000-2002 era was also characterized by strong growth in non-price factors as enrollment in more loosely managed care plans increased and spending for new blockbuster prescription drugs rose rapidly. Non-price factors grew on average 4.8 percent during this period and accounted for 60 percent of personal health care spending growth, about the same average share as the 1966 – 1973 era.
Additionally, variations in practice patterns, improvements in technology, and the availability of new treatments have contributed to changes in the intensity of services provided. Improvements in medical technology are generally considered to be a significant driver of health care spending growth. Enhancements in technology, in turn, are largely affected by growth in income and increased generosity of health insurance coverage. Since 1960, improved diagnostic and surgical procedures, the availability of new drug treatments, and numerous other technological enhancements have influenced health care spending trends. An analysis conducted by the CMS Office of the Actuary indicated that technology accounted for approximately a quarter to half of health expenditure growth during 1960 through 2007.
Overall economic conditions also affect the utilization of health care goods and services. As the economy contracts, individuals, businesses, and state and local governments generally have fewer available resources to pay for health care and are inclined to become more cautious regarding spending. At the same time, individuals may experience the loss of health insurance coverage and a reduction in household income — factors that cause them to postpone or forgo health care purchases, particularly for more discretionary services.
However, during periods of economic expansion, the sponsors of health care spending generally have more resources available to pay for care and may increase their support for such expenditures. In both instances, the influence on health spending from economic factors occurs with a lag such that health sector cycles follow economic cycles.
Changes In Who Pays For Care
Over time, the responsibility for paying for health care goods and services has evolved as new programs and payers emerged and expanded. Likewise, the sponsors (households, businesses, and governments) of these payers and programs have changed significantly over the last half century. In 1960, private sponsors (households, businesses, and other private entities) financed just over three quarters of all health care expenditures; by 2013, however, private sponsors accounted for just 57 percent of all health care expenditures (Exhibit 2).
The largest shift during this period was for households, which financed 56 percent of total health spending in 1960 but just 28 percent in 2013. Over the same period, spending by governments increased from less than one quarter of all health expenditures to 43 percent, mostly due to increases in Federal spending. In 1960, Federal spending accounted for 11 percent of health expenditures; by 2013, it had increased to 26 percent, largely due to the implementation and expansion of the Medicare and Medicaid programs.
The Next Era Of Health Spending
Health care spending increased from 5.0 percent of the economy in 1960 to 17.4 percent in 2013 and is projected to reach almost 20 percent by 2024. Over the last half century, the trends in these expenditures have been influenced by changes in health care prices, technology, insurance coverage, utilization, intensity, and the population, among other factors. Although the next era of health spending has yet to be determined, future changes in these factors will continue to define and influence the trajectory of expenditures.
In the near term, national health care spending is expected to be affected by improved economic conditions, as well as by increased insurance coverage—due to the ACA's expansion of Medicaid and implementation of the health insurance Marketplace—and by the aging of the population. Over the longer term, it is more difficult to anticipate the factors (such as modifications in how health care is provided and the emergence of new medical technology) that will influence spending. In the 2015 Medicare Trustees Report, long-range per capita health care expenditures are projected to increase by 4.9 percent in 2039 (or 0.9 percent faster than per capita GDP), and spending growth is expected to decline gradually to 4.4 percent in 2089 (or 0.5 percent faster than the rate of per capita GDP).
Authors' Note
The opinions expressed here are the authors' and not necessarily those of the Centers for Medicare and Medicaid Services.
Editor's Note
Today, Health Affairs Blog is also publishing a post by Richard Foster, former CMS Chief Actuary, responding to this post and discussing health spending trends. In addition, watch for the paper on 2014 national health spending by the CMS Office of the Actuary, which Health Affairs will publish as a Web First on Wednesday, December 2.
from Health Affairs Blog http://ift.tt/1N4z7js
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