Health Care Spending Spikes: Why?

Recent data from the Bureau of Economic Analysis (BEA) reveals that  during the last three months of 2013, spending on health care rose at an annual rate of 5.3%. The trend continued this year, with spending climbing 6.2% on a year-over-year basis in January and 6.7% in February. Now some of Obamacare’s fiercest critics are saying “I told you so.”

“We knew this was coming,” gloats Douglas Holtz-Eakin, John McCain’s former economic adviser. “The question now is whether we can hold spending down.” It’s worth recalling that Holtz-Eakin, who served as CBO director under George W. Bush, has been wrong in the past. When I debated him on the Lou Dobbs show in 2009 he insisted that the ACA would leave us with a “ton of debt.” In fact it has reduced the deficit. And in March of 2013 when testifying before the House Energy and Commerce Committee’s Subcommittee on Health Holtz-Eakin had the chutzpa to declare that “There is anecdotal evidence, of [Exchange] premiums nearing $100,000 in New York.”  This was, of course, utter nonsense.

Still, the surge in spending came as a surprise. Since December of 2007, after adjusting for inflation, health care outlays have been rising by only 2.6%  “The sudden jump has led some some commentators to declare an end to the era of slower health-cost increases, which has lasted for the past several years,” observes former CBO director Peter Orszag observes.  Yet, Orszag notes, “Medicare spending growth is still low, even through last month. Indeed, in the first half of this fiscal year, nominal Medicare spending was only 0.6 percent higher than in the corresponding period a year earlier.”

Why Have Outlays Risen for Those Under 65, But Not for Seniors?

BEA suggests that the jump during the first two months of this year reflects the fact that, thanks to the Affordable Care Act (ACA),  more Americans had comprehensive insurance that gave them access to a wide range of services.

Those who became insured in January and February are the folks who signed up at the very beginning of the enrollment period. No doubt many of them had been postponing needed care for a long time. As soon as they were covered, they began visiting doctors, scheduling elective surgeries, and filling prescriptions. Medicare patients, by contrast, had no reasons to seek more care at the beginning of 2014. Their insurance had not changed.

Going forward, won’t the fact that more Americans are insured mean that health care spending will continue to climb?  “No”, says  Larry Levitt, a senior vice president at the Kaiser Family Foundation (KFF). This “will be a one-time bump in health spending.”

The Congressional Budget Office (CBO) recently released a report that supports the theory that  we have begun to break the curve of health care inflation.  The ACA will cost about $1 billion less than originally projected, the CBO reported, even though we will be covering more people. This is largely because premiums on the Exchanges turned out to be lower than expected, and those lower premiums reflect the fact that, for several years, the underlying cost of health care has been slowing. This  in part because, once the ACA passed Congress, providers knew that they would need to cut waste. “Historically, we have always seen the health-care marketplace respond by lowering costs when there is the threat of impending health reform legislation or government action on costs. Now we have not only the threat but the reality,” says KIFF’s Drew Altman. 

Spending Spike at the End of 2013 May Well Be Temporary, But What About the Spike at the End of 2013? 

The uptick in January and February can be explained by pent-up demand but Americans began layout more for healthcare “well before January,” BEA points out. How does one explain the surge in private sector spending in the final quarter of 2013?

Some observers suggest that the spike in health-care spending that we saw during the last three months of 2013 may have reflected the panic that spread during the months before the ACA kicked in.. The Wall Street Journal’s  “MarketWatch” puts it this way:  spending  may have risen in the fourth quarter as consumers and companies prepared for the official rollout of the law on January 1. It might not  last.”

This makes sense.

My guess is that many people who knew that their policies were going to be cancelled in January used that insurance during the final months of 2013 because they didn’t know: a) whether they would find new coverage in their Exchange and b) whether they would like it as well as their old policy.

                  Uncertainty About the Future, Patients Seek Treatment

Keep in mind that in the final quarter of 2013, the Exchanges were not working well. Those who needed to sign up for new coverage were anxious, and the media was stirring the pot by telling them that, in the Exchanges, out-of-pocket expenditures would be sky-high. If you were thinking about having a hip replacement, you might well decide to schedule it in October, rather than taking a chance that under your new Obamacare policy, you would have to pay down a $10,000 deductible before your insurer laid out a penny for the surgery. Many people who couldn’t get through on the Exchanges didn’t even know if they would find new coverage.

In fact average deductibles and co-pays in the Exchanges would turn out to be relatively lowOnly bronze plans come with high deductibles (averaging $5,081 a year). And just 19% of Exchange shoppers wound up with Bronze plans.

 Sixty-two percent picked silver, and the  average Silver plan calls for a deductible of  $2,905–40% lower than the average Bronze plan– and roughly $700 less than the typical deductible in the individual market pre-Obamacare.  Gold and platinum plans ask for even less cost-sharing. Many offer “zero-deductible” coverage.

But in the fall of 2013, relatively few people knew the facts. They only knew what they heard on Fox. . 

In addition Americans who had received cancellation notices were worried, not just about out-of-pocket expenses, but about losing their doctors.  Reform’s opponents were warning that insurers selling policies in the Exchanges had created “narrow networks” of providers. Americans who bought new insurance might not be able to continue seeing the specialists they trusted. They might not have access to a hospital that they knew.This would be another reason to scheduled more appointments and procedures in the final quarter of 2013, while you could still use your old policy.

This also helps explain why Medicare spending did not rise in the final quarter of 2013: Medicare beneficiaries had little reason to worry about losing their doctors in 2014.

Going forward we may see another blip in healthcare spending as the newly insured receive care that they had deferred. But most of those who were anxious to see a doctor enrolled in the Exchanges in October, November and December, and began getting care in January and February. Those who signed up for insurance in during the final surge of enrollments are more likely to be young and healthy. My guess is that spending will slow next month.


4 thoughts on “Health Care Spending Spikes: Why?

  1. My instinct is that as ACOs, the trend for hospitalists and other delivery variations pick up there will be downward pressure on prices. Frankly, until ACA I think a lot of places never paid much attention to what the rest of America knows to be ordinary business expenses.

    Just last week I was reading about a private surgery center started by a couple of independent doctors that is basically a “cash and carry” model. They knew they could do a variety of procedures cheaper than the going rates, and actually published a price list! Something like a menu…unheard-of! And they were shocked at how much lower they really were than the hospitals and specialty places.

  2. If Obamacare takes off and everyday signs up Health Care costs will skyrocket. Everydody who has insurance uses it. If everydoby uses it the total cost will rise. Ipso facto The more that sign up for Obamacare the faster costs will rise.

    Second ACA cannot have lower the deficit it has only been in effect for a couple of months and you are ignoring the $600,000,000.00 plus spent on the web site and all the federally paid facilitators let alone the rest of the implementations costs. Maggie before you start talking numbers instead of ideas have a CPA look at your numbers. You won’t embarrass yourself.

  3. I tend to agree with you that a majority of new sign-ups for Obamacare are from the young and healthy, so you’d hope that would mean spending wouldn’t increase significantly. But there are still plenty of services that the young and healthy use. Maternity would be an example of a costly one. So time will tell…

    • Barry–

      Yes maternity care can be costly–though not nearly as expensive as the cardiac or orthopedic surgery that older people

      And when a couple has a child that adds one more very young person to the pool. Children are normally very cheap to insure; meanwhile the couple begins paying premiums for 3 people rather than 2. . .

      All in all people under 40 help make insurance less expensive for all of us.