Explosive Numbers

In 2006, health care spending averaged $7,026 per person. By 2017, that will shoot up to $13,101.

Three-alarm warnings about the rise in health care spending have become routine in Washington D.C., yet, they rarely linger past the 24-hour news cycle.

When government officials at the Department of Health and Human Services rolled out the latest numbers on the looming financial showdown, Kerry Weems, acting administrator of the Centers for Medicare & Medicaid Services, saw the headlines die down fast.

“After the trustees report, there was a day of talk and that was it,” says Weems. “Congress won’t act on our budget” and the political system won’t respond to the Bush administration’s bitter recipe of cost control proposals for those two federal health programs.

What isn’t dying down, say a lineup of actuaries and economists, is the rate at which health care spending is growing.

For the past three decades, according to CMS actuaries, health care spending in the United States has on average grown 2.7 percentage points faster than gross domestic product. In each of the past five years, spending on health care has jumped an average of 6.8 percent, barreling ahead of inflation even as government economists outlined a small but significant decline in the average income of middle class families. Medicare, which annually sifts through the numbers to deliver its report card, sees the past predicting the future, with spending jumping 6.7 percent per year until 2017 as health care costs balloon from $2.1 trillion in 2006 to $4.3 trillion.

In 2006, health care spending averaged $7,026 per person. By 2017, that number should shoot up to $13,101, accounting for 20 percent of GDP (this year, it’s estimated at 16.3 percent of GDP).

The rise in spending has fed a growing demand for cost-control tools, creating an industry of disease management companies, consumer-directed health plans, quality initiatives, wellness programs, and more. All of those measures are still works in progress, but nothing has significantly blunted the spending increases. In fact, the single biggest recent reduction has come in pharmaceuticals, for the simple reason that the FDA’s approval of new chemical entities has dropped just as drugs are losing patent protection. The decline in new drug approvals hasn’t resulted from a lack of trying, and as new biologics gain approval, that trend could be short-lived.

The key statistic for economists, though, is the relentless way that spending growth has consistently outpaced growth in the country’s GDP.

Meltdown ahead?

There have been fluctuations in the not-quite-parallel trend lines of rising health care spending and GDP growth, says Stuart Altman, PhD, a health care economist and dean of the Heller School at Brandeis University.

“Some experts predicted we’d reach meltdown when the health care industry hit 10 percent of GDP. Now people are saying we’ll hit 18 percent or 20 percent and the system will just melt down,” says Altman. “Sitting behind that is the fear that Medicare will just run out of money.

“Either this 2 percent [gap between spending growth and GDP growth] is inevitable and any attempt to move us off that trend line is bound to fail or we lack the political and staying power to force us off, and I think the latter is the case,” says the economist. “There are forces that are fairly powerful pushing in on a 2 percent basis, but we could go off that trend line. It requires a willingness to hang in there with a strategy, either a market-based or a regulatory strategy.”

Gail Wilensky, who ran Medicare and Medicaid in the early ’90s, is also worried. “I don’t want to go so far as to say we can’t slow it down, but we have a very long history now of spending growth rates that substantially exceed the rest of the economy,” she says. The one exception has been a few years in the 1990s, a time when insurers were taking aggressive action against costs and the Balanced Budget Act put a brake on Medicare.

Looking back over the past half century, though, that 2 percent to 2.5 percent rise in spending over GDP has been a constant. “That really is the story,” says Wilensky, “and what that means is that to have a different outcome will require putting in motion a number of different forces and recognizing that when you’re trying to get off a historical growth trend of a very long duration, it’s not going to be easy.”

Adds Weems, “I don’t think it will continue. I don’t think it can continue.” Maybe after four or five years, he says, the numbers might add up to an unavoidable call for urgent action.

Others say the rise in spending has already hit the boiling point.

“We’re no longer dealing with just the health care issue; we’re now dealing with an issue that’s creating a major national economic crisis,” says Henry Simmons, MD, president of the National Coalition on Health Care — a who’s who of Fortune 500 executives, politicians from both parties, and other high-profile figures. “Health care spending has an impact on jobs, pension adequacy, international competitiveness, and more. This is a huge monster with ramifications way beyond what much of the debate focuses on now — the impact of health care costs.”

Every year that slips by without an effective antidote ratchets up the pressure.

“Taking measures now would be easier than measures in five or six years,” Weems offers. However, several of the numbers experts say there’s no reason to believe that anything significant will happen in that time.

Something has to give

For an actuary, it’s clear that the way health care is delivered in America — the make and model of a system built over decades — is designed for steady acceleration. Many of the new programs aimed at slowing it down will have no more effect than a gentle breeze.

“We have an economic model where the people doing the demanding are not the people paying,” says Bob Tate, chief actuary in the health management consulting practice of Hewitt Associates. “And the people doing the supplying are supplying as much as they feel they can. That model is probably the main driver behind why the numbers are so consistent.”

To try to gain a measure of control, companies have struck back with disease management programs, wellness initiatives, and more. While individual employers may influence their own island of numbers, the changes aren’t slowing the nationwide cost trend.

Says Tate: “I haven’t seen a lot of direct evidence of things that will successfully affect the spending trend over the next four or five years.”

Just after Tate started focusing his actuarial talents on health care in 1994, there was a period of several years when health care spending shifted into a lower gear. MCOs aggressively managed costs, earning the enmity of much of the public. The Balanced Budget Act engineered significant changes in the rates for Medicare services.

“Somewhere out there in the future, so our entire economy does not become health care, there’s another event like that, probably more than one,” says Tate. “We can’t keep going like this forever. Until then, it seems like something has to give at some point. The problem is that we haven’t any idea of what that is.

“There is a limit to how much of the economy can be taken up by health care,” he adds. “But we don’t know what that limit is. Right now, at 16 percent of GDP, we don’t seem to have hit that threshold. As a nation, we continue to spend on new electronic gadgets, fancy cars, and video games. On a macro level, we aren’t seeing our spending on these types of goods deterred by what we’re paying for health care. It can get bigger; we just don’t know how much bigger.”

Peter Orszag, director of the Congressional Budget Office, has become so alarmed by the spending trend that he has mounted a virtual crusade to highlight how the rising cost of health care presents the country’s biggest fiscal challenge. He’s adamant that much of the policy discussion so far has been simply misguided.

“We have misdiagnosed the nation’s long-term fiscal problem and described it mostly in terms of aging and demographics,” he said in a recent speech, “when in fact it’s mostly the rate at which health care costs grow.”

Crisis or not?

CMS’s latest prediction is “actually a fairly optimistic projection,” says Paul Ginsburg, PhD, president of the nonpartisan Center for Studying Health System Change. “I looked at the difference between the trend of GDP and health spending, which is 2.5 percent over a long historical period, and the latest [CMS] forecast is 1.9 percent. That’s optimistic. It’s hard to get a sense of why they’re projecting it to be lower than it has been. It’s hard to imagine, without some really substantial change, it coming in that much lower.”

It’s easy, though, for Altman to see the range widening rather than narrowing over the next few years.

“This economic downturn, if not recession, is going to change a lot,” says Altman. “If it lasts a long time, a recession will do two things: The percentage of GDP going to health care is going to shoot up, even without spending growth, and there will be an increased number of uninsured.”

The debate over health care will heat up even more.

“I would have thought serious reform would be pushed to 2012,” he adds, but a recession could accelerate a showdown to next year.

Uwe Reinhardt, PhD, a prominent health care economist at Princeton, takes a somewhat contrarian view.

“The nation could afford 20 percent of GDP,” he says. “Even if we spent 20 percent of GDP on health care, non-health GDP will still be so much larger we can afford to absorb it.”

Project the numbers out to mid-century, when health care spending would be 40 percent of GDP, and it’s still theoretically possible. The other 60 percent of GDP would represent a much larger economy that could still provide much of what we consume today.

“You could, economically, afford it,” says Reinhardt. “Of course, one should also keep in mind that at 40 percent of GDP, health care would be the sole economic locomotive of the economy, which it already is today.”

That kind of growth rate is attributable to an underlying philosophy Reinhardt sees at work in health care. Providers are given a green light to do really whatever they want to do. Manufacturers can make and sell anything they want, for whatever price it can fetch. “You do whatever you think is right,” Reinhardt summarizes the message to providers. “You’re great and the best in the world. Just give us the bill. That kind of attitude seems to be shifting ever so gradually, ever so glacially.”

Reinhardt also warns of some “nasty” things going on in the economy today, primarily a surge in gas and food prices eating into the family budgets of the lower third of the population. Once the lower middle class is priced out of health care, he says, the issue becomes unavoidable.

“It has to get big,” says Reinhardt. “I don’t think compassion will drive this debate.”

Learning how to say ‘no’

There has been some easing in the growth of particular spending categories.

Ginsburg and Wilensky both note that CMS has reported a significant dip in drug spending. “The biggest factor behind those lower trends is major blockbusters coming off patent, combined with the absence of new blockbuster drugs,” says Ginsburg. Biotech drugs may drive that up, he adds, but biologics serve smaller populations, and steep new copayment requirements in tiers 4 and 5 “will constrain the use of the drugs.”

CMS isn’t projecting anything other than a temporary dip in the rate of growth of drug spending. The nation’s drug bill hit $231.3 billion last year and will more than double to $515.7 billion in 2017.

The biggest constraint on cost growth has been a shift of some of the health care bill from employers to individuals. But then another big trend kicks in — as spending grows faster than income, more and more people can’t keep up. “You have increasing erosion of private coverage,” Ginsburg says. “Some people just can’t afford it.”

So the same economic forces remain at work. Employers, he says, are likely to maintain the same percentage split on a bill that keeps swelling, making it less and less likely that individuals — most of whom can look forward to stagnant wage growth — can afford all the care they need. Most companies that offer insurance continue to do so, while many new companies won’t ever offer it.

A host of reformers, including presidential candidates, offer fine ideas for health care change. Ginsburg is skeptical that any will drive a fundamental reordering of the system.

“We have some good ideas,” says Ginsburg, “but none of them can confidently say they will have a big effect on cost — not to say they’re not worth pursuing. People have vague ideas of the directions ahead, but there is no magic bullet out there. Maybe two years from now we’ll have a better sense of more striking steps that might take place.”

It won’t be easy — which is part of the problem.

“Managed care has really backed away from doing any serious managed care,” says Altman. “In much of this latest decade, it’s been managed care ‘lite.’ And some would say we’ve gone back to fee-for-service insurance with little bells and whistles wrapped around it. Insurers found it easier to let doctors and hospitals do what they want, which may sound a little cynical.”

Ginsburg says that few politicians are really willing to talk about costs. “It may be painful to address costs, and they’re still telling us they have painless solutions — information technology and effectiveness research,” says Ginsburg. “I don’t know how much longer it will be before we contemplate steps that make people unhappy. It’s one thing to conduct effectiveness research, another to use it.”

Eventually, we’ll be distinguishing between what has benefit or marginal benefit. And then comes refusal to pay for services that don’t measure up.

Says Ginsburg: “We’ll be saying ‘no’ more often.”

Price control v. reform

“No” is exactly what regulators in the United Kingdom say regularly. In April, for example, analysts at the National Institute for Health and Clinical Excellence concluded that Tarceva — which boasts of greater tolerability for patients — wasn’t cost-effective at the manufacturer’s price of $3,224 a month.

That decision wasn’t welcome by cancer groups in the U.K., and you won’t find many advocates for government-controlled health care spending in the U.S.

“It’s really going to be a question of what direction do we want to go that will be acceptable to the American public,” says Wilensky. “My preferred strategy is harnessing the large amount of information we have about what works when and making a serious investment in finding out what we don’t yet know on new procedures and technologies. The alternative that other countries have attempted is very aggressive control of the total amount of spending.”

In a country generally dubious about giving government control of the market, that may never work.

“If you try to enforce global budgeting, you can control spending, but that’s not what the country will probably want to do,” says Wilensky. Government spending controls in the U.S. historically are reserved for short-term emergencies, not as a long-term strategy.

“We need to do away with the fee-for-service system and go back to something resembling some form of bundled payment or, if you’ll excuse the expression, capitation,” says Altman. “We need to re-energize the integrated delivery system and coordinated care, which were aggressively moving forward in the ’90s. We need to restructure delivery, invest money in comparative effectiveness, and use value-based pricing.

“We don’t necessarily want to do like it like England, where they don’t pay for those services,” but higher tiers could be created that would require people to pay more for high-cost, low-value health care.

“Our National Coalition on Health Care reform program does change the whole system, not just the cost of care but the quality of care, the organization of care, and most of the major drivers of why the system is out of control today,” says Simmons. “The other reason other nations ensure universal coverage and spend less per capita is that they have taken the steps necessary. Their citizens are every bit as healthy, they spend less, and they’re more satisfied.

“I don’t have to name England,” he adds. “We support a massive improvement in quality and efficiency, universal coverage, and cost containment. Our strategy includes budgeting and rate setting mechanisms, the same as many other countries.”

Cockeyed optimism?

Some of the trendiest new methods for controlling health care costs are likely to inspire mirth among economists.

“Wellness programs are not real,” chuckles Altman. He had hoped that disease management would work, and it may yet, “but unfortunately the evidence isn’t very supportive. There’s very little evidence that disease management justifies its cost.”

If you avoid giving the government power over what will be paid for, there are still plenty of advocates for arming up with a range of weapons.

“I believe that the solution to the rates of growth we see in health care requires a whole armamentarium of tactics and strategies,” says Weems, the acting CMS administrator, “including good disease management programs, including aligning incentives, and including bringing health care into a more market-oriented kind of a program.”

Part of what makes Weems and others optimistic that something significant can be done comes from clear signs that health care costs in the U.S. vary widely by region, without any statistically significant variations in health care outcomes. If Americans in one area can enjoy lower cost care without worse health, applying that approach nationwide would help manage spending.

“If patients lived in northern New Jersey, Medicare was two to three times as much as similar patients living in the southern part of New Jersey,” says Reinhardt. “And Congress has said we don’t want to tell you how to practice medicine, we just want to regulate the price.”

Reinhardt also points out that there’s a huge amount of waste built into the system, with a splintered group of private and public payers spending far too much money pushing paper. In Taiwan, he says, health care spending can be tracked patient by patient, in real time, through very efficient technology.

“We’re not locked in,” says Weems. All those various management tools “hold the promise of being able to reduce the growth of health care spending. That’s why we have tried disease management and are trying electronic health records. It’s important to find the things that work and the things that don’t work.”

“Saying it can’t be done is to doom ourselves,” says Wilensky.

More money isn’t the answer, either.

“When people say, here’s a new revenue strategy, I just cringe,” she adds. “If we put more money in the system we know what will happen — we’ll just kick the ball further down the road.”

The way the system works now, there’s really often little data to determine the value of the care we receive.

“There was a piece on the front page of the New York Times last fall about how ablation therapy is now a favored procedure for atrial fibrillation, and two thirds through, there was the comment that it’s not clear what ablation therapy does relative to more conservative medical treatment — warfarin,” says Wilensky. “My thought was that Medicare might want to invest a little money to find out.”

Getting rewards from value-based medicine, or any new strategy, though, takes years to build. “We need to get going.”

When will that happen?

“Beats me,” answers Wilensky. “I would have thought it would have happened a long time ago.”

There are no guarantees that any fundamental change in spending patterns will happen anytime soon. There’s little doubt that the debate over dealing with it is far from over.

Says Wilensky: “These are not issues that are going away.”

The numbers won’t allow it.

For further reading

Anderson GF, Reinhardt UE, Hussey PS, Petrosyan V. It’s the prices, stupid: Why the United States is so different from other countries. Health Affairs. 2003;22(3):89–105.

Draper DA, Ginsburg PB. Health care cost and access challenges persist: Initial findings from HSC’s 2007 site visits. Issue Brief Cent Stud Health Syst Change. 2007;Oct(114):1-6.

Emanuel EJ. The cost-coverage trade-off: “It’s health care costs, stupid.” JAMA. 299;8:947–949.

Keehan S, Sisko A, Truffer C, Smith S, et al. Health spending projections through 2017: The baby-boom generation is coming to Medicare. Health Aff, 27;2: w145–w155.

Reinhardt UE, Hussey PS, Anderson GF. U.S. health care spending in an international context. Health Aff. 2004;23(3):10–25.?

Pharmacy costs from here to 2017

The recent slowing in the rise of drug costs might not last for long. It happened because the FDA’s approval of new chemical entities has dropped at the same time that blockbuster drugs are losing patent protection. As new biologics gain approval, that trend could be short-lived.

In 2005, specialty pharmaceutical spending accounted for nearly 10 percent of total pharmacy spending, up from 5.6 percent in 2003, according to “Drug Trend Report 2006: Personalizing Healthcare,” from Medco Health Solutions.

Projected expenditures for prescription drugs and sources of payment (billions)

Note: “Insurance” is a subset of “total private” and “Medicare” is a subset of “total public.” “Expenditures” is the sum of “total private” and “total public.”

Source: Centers for Medicare & Medicaid Services, Office of the Actuary