5 Things to Know About Health Spending Trends and Their Drivers

Healthcare spending has long been a substantial component of the national economy, and new projections foresee this growth will persist in coming years, though slowdowns are expected. The complex factors that contribute to health expenditures include trends in healthcare costs and utilization, but spending is also partially driven by health policy, consumer behaviors, and technological advances.

Here are 5 things to know about health spending projections and their causes.

1. A look at the recent patterns and projections for health spending

The National Health Expenditure Data from CMS indicates that US spending on healthcare will continue to grow, but at a less rapid pace than it has in previous years. In 2015, spending grew 5.8%, but according to the Altarum Institute, spending increased 5.2% in 2016.

CMS projects that from 2016 to 2025, national health spending will grow by an average of 5.6% annually. By 2025, it predicts that healthcare expenditures will be responsible for almost one-fifth (19.9%) of the gross domestic product, an increase from its 17.8% share a decade prior.

2. This growth is concentrated in outpatient settings

Katherine Hempstead, PhD, MA, of the Robert Wood Johnson Foundation, wrote in a recent report that spending has grown more in physicians’ offices than in hospitals since 2014. In fact, physician spending grew by more than 6% throughout all of 2015 and 3 quarters of 2016. This has been accompanied by job growth of 30% in ambulatory settings from 2007 to 2017, representing around 1.7 million new jobs in America, according to a Health Affairs blog article Hempstead co-authored.

PwC projects that in 2017, physician spending will contribute to 30% of employer health benefit costs, while outpatient care will be responsible for 19%. Inpatient costs will also account for 30%, and pharmacy benefits 17%.

3. Outside drivers of spending growth

Whether the spending growth is driven by increases in spending or utilization, experts say there are some broader trends that are likely contributing to the rising expenditures. According to Hempstead, as formerly uninsured people gain coverage they are more likely to seek care for the health issues they had previously avoided treating, which she calls “pent-up demand.”

Another outside influence on health spending, she wrote, is the explosive growth of telemedicine. As healthcare systems invest in costly telemedicine resources, some consumers are even buying additional coverage packages so their insurance will pay for telehealth services.

4. Seesaw of inflators and deflators

According to PwC, not all outside influences are causing spending to grow; instead, the expenditure projections are the result of a complex equilibrium of factors, some causing additional spending, some saving money, and some having a net neutral effect. The 2 inflators it cited are the increased costs of convenience, as retail clinics and other sites invite more utilization, and the expansion in behavioral health coverage, which employers now must cover.

These inflators are counterbalanced by 2 deflators: high-performance networks, as employers offer value-based benefits instead of relying on cost sharing, and a slowdown in the growth of drug costs, which can be curtailed by more aggressive pharmacy benefit manager (PBM) strategies and potential political efforts. The impact of specialty drugs, PwC says, will be a net neutral, as spending on these drugs will decelerate this year.

5. What these trends mean for different stakeholders

In light of these coinciding drivers, PwC offers some tips for different players in the healthcare economy to stay competitive. For instance, healthcare providers should focus on offering convenience to customers and be open to new collaborations with other health systems, insurers, and PBMs.

Payers and employers, meanwhile, will benefit from shifting to a high performance model that turns away from cost sharing to emphasize value. Finally, pharmaceutical companies will need to set drug prices with several factors in mind, including the future impact of competitors and generics as well as the public’s reaction to price hikes.