Why Is Healthcare Spending Growing? Let’s Start with Prices

By Shareef Ghanem

Criticism of the US healthcare system often focuses on the most accessible metric of the health and sustainability of our healthcare industry — total spending. The verdict is clear — we spend more on healthcare than almost any other nation, and we can’t always tie that spending to better quality care. Still, for a number we track obsessively, it can be hard to understand the drivers of growth. This is a complicated question, no doubt, but let’s see if we can unpack (at least) some of the details.

First, an important framework: Total Spending = Volume (# of services, drugs, etc.) X Unit Price. Increases in spending are a combination of increases in volume of services, price per service, or both.

We can get a basic picture by looking at some of the nationally-reported figures. Each year the Federal government publishes a lengthy report on the national health expenditure.

Figure 1

What Figure 1 shows is that price is a consistent contributor to increases in total healthcare spending. Many experts have commented that what is most surprising about this picture is that price is a factor at all. The two largest payers — Medicare and Medicaid — have not increased prices in the last few years. In 2015, a more important driver was what the actuaries at the Centers for Medicare and Medicaid Services (CMS) called “residual use and intensity” — in other words, utilization. What complicates this picture is the expansion of coverage under the Affordable Care Act. Millions of previously uninsured Americans have received coverage on the individual insurance market and through Medicaid, which undoubtedly increased total utilization and per capita healthcare utilization.

Next, let’s try to remove the effects of coverage expansion. The Health Care Cost Institute (HCCI) publishes a similar report focused specifically on the employer-sponsored insurance market. This market has been relatively stable in recent years. Here’s what they had to say about healthcare spending in 2015:

“In every year studied, the biggest driver of per capita spending growth was increasing prices. However, in some years increases in the utilization of services also played a role in spending growth.” — The Health Care Cost Institute

Figure 2

By HCCI’s analysis (Figure 2), we see a different picture. Price, more than utilization, contributes meaningfully to increases in total cost. In fact, by HCCI’s estimation, utilization hasn’t changed, but price has increased.

Here is why this is all quite troubling: over the last few years, we’ve seen jargon like “the shift to value” talked about ad nauseam. Every healthcare organization — provider or insurer — touts its efforts in value-based care. The trouble here is that value is fundamentally a function of price, and we’ve shown consistently over the last decade that our healthcare system cannot efficiently price healthcare services. We are trying to fix a total spending problem without addressing the underlying market forces that created the problem.

We are pushing towards this notion of value, but it’s a moving target because we ignore a key driver of both value and spending — price.

OK, so how did we get here and how do we fix this? We’ve got some ideas at Markit — more to come on that soon.

The articles that informed this post:

  • Health Affairs: National Health Spending: Faster Growth In 2015 As Coverage Expands And Utilization Increases (Link)
  • Health Care Cost Institute: The 2015 Health Care Cost and Utilization Report (Link)
  • Health Affairs Blog: “National Health Spending: A Return To The ‘Old Normal?’” (Link)