Hospital price increases, driven in part by wage increases for hospital employees, also are expected to accelerate in coming years.


Feb. 20—Hospital care spending is expected to accelerate over the coming 10 years as Medicare enrollments surge, more states expand Medicaid eligibility, and prices increase.

The 5.1 percent increase in hospital spending expected in 2019 will be dwarfed by a 5.7 percent average annual increase from 2020 through 2027, according to new projections from the Office of the Actuary at the Centers for Medicare & Medicaid Services (CMS).

The annual projection also concluded that overall national health expenditures will increase at an average annual rate of 5.5 percent from 2018 through 2027, at which point they will comprise 19.4 percent of GDP. Health spending in 2019 is 17.9 percent of the economy—the same as the 2018 share.

The projection of healthcare spending as a share of the economy drew some pushback since a previous actuary projection in 2006 expected it to reach 20 percent of the economy by 2015, and a 2010 estimate projected healthcare spending to reach 19.6 percent of the economy in 2019.

“We are not mocking CMS’s forecasting ability but rather are observing deep structural changes in the health sector that are affecting underlying dynamics,” said George Miller, a fellow at the Altarum Institute.

In addition to the coming increases in hospital care spending, the data showed an expected 6.1 percent average annual increase in drug spending from 2020 through 2027 and 5.4 percent annual increases in spending on physician and clinical services.

The coming spending increases for hospitals are greater than those organizations have seen in recent years. Hospital care spending increased by 4.4 percent in 2018 and 4.6 percent in 2017.

For 2019, the spending acceleration at hospitals will be driven by faster growth in Medicare hospital payment updates and an increase in the use of hospital services associated with new Medicaid expansion-related enrollees. The report noted that five states either implemented an eligibility expansion this year or have approved but not yet implemented one.

Those spending increases were “somewhat offset by slower expected growth in private health insurance hospital spending, which is partially attributable to the repeal of the individual mandate,” the report stated. The 2017 federal tax overhaul eliminated the individual-mandate tax penalty beginning in 2019.

The acceleration in annual hospital care spending after this year will be driven by more Medicare spending, which will peak in 2026 with a 6.1 annual increase.

Medicaid spending growth also will accelerate in 2026, when cuts in Medicaid disproportionate share hospital (DSH) payments expire.

Private health insurance spending growth on hospital care is expected to peak in 2024.

Price Increases

The CMS actuary also expected an acceleration in hospital price increases, driven in part by wage increases for hospital employees. Hospital prices were expected to increase by an annual average of 2.6 percent over the next decade.

In other categories, the report projected average annual price increases over the next 10 years of 2.8 percent for drugs and 1.8 percent for physician practices.

The hospital wage pressure was expected because there has been low wage growth since the end of the 2008 recession, while hospital employee labor markets have continued to tighten.

The expected wage impact follows aggressive hospital hiring in recent years, including the addition of 112,000 positions over the last year, according to data from the Bureau of Labor Statistics.

The wage pressure also will result from an aging population that will demand more medical services.

“One would expect that as physician offices compete with hospitals and compete with other types of health care for nurses, for example, that higher competition is expected to lead to faster increases in wages,” Sean Keehan, an economist in the Office of the Actuary, said in a media briefing.

Spending increases on hospital care will be constrained in part by Medicare payment updates that are reduced by growth in economywide productivity, which is projected to accelerate in the coming decade.

Price growth for physician and clinical services, which has remained near historically low rates in recent years, is expected to remain slow, with practices using more nonphysicians to provide care. The report credited that trend with increasing productivity and profits even amid slow price growth.

A factor contributing to the projected growth in overall physician and clinical services spending over the coming decade was the actuary’s anticipation of accelerated price growth.

“Underlying this acceleration are projected rising costs related to the provision of care,” the report stated. “In particular, wages are expected to increase as a result of the supply of physicians not being able to meet expected increases in demand for care connected with the aging population.”

For physician practices, future productivity increases from the expanded use of nonphysicians to provide care could be limited by licensing restrictions on the scope of care that may be provided by nonphysician providers.

Personal Spending

Over the next 10 years, the actuary projected, personal healthcare spending growth will average 5.5 percent, with about half of that driven by economywide and other price inflation. Such inflation is expected to overwhelm factors that in recent years have slowed price increases, including price sensitivity by consumers and insurers—especially from cost sharing, selective contracting, and productivity improvements through a greater use of lower-cost providers.

Keehan said the projection does not anticipate a reduction in such cost-saving efforts, only that they will be overwhelmed by countervailing economic pressures.

“Accelerations and decelerations in income growth can influence the degree to which [people], particularly private health insurance enrollees—approach their utilization of health care,” Keehan said. “What our 10-year projections are intended to do is reflect the net result of all those different pieces by different payers and different sectors.”


Rich Daly is a senior writer/editor in HFMA’s Washington, D.C., office. Follow Rich on Twitter: @rdalyhealthcare

Publication Date: Thursday, February 21, 2019