Don’t Believe Everything You Read in the Paper

Reports on health care spending have a tendency to get spun up for dramatic and dynamic effect. Is spending up? Is it down? Have we reached a historical high or a historical low? At various intervals over the past four months, the popular press has cited one source or another to support each of these contradictory messages.

The most recent confounding salvo came from the federal government’s Bureau of Economic Analysis (BEA). That’s the agency that tracks gross domestic product (GDP), the all-encompassing measure of everything produced in America. On April 30, the BEA announced its “advance estimate” of first quarter GDP, recently updated to a depressing –1% annual growth rate. What got more attention were the Bureau’s estimates for the 18% slice of GDP pie represented by health care. The health care economy, as reported by the BEA in April, grew by $43 billion in the first quarter—an annual growth rate of 10%! The blogosphere erupted immediately. Depending on the political proclivities of the commentator, this news was variously interpreted:

  • See, Obamacare doesn’t work!
  • Hospital and insurance company CEOs are paid too much!
  • ACOs didn’t tame cost inflation and never will!
  • It’s the fault of those Florida doctors who are bilking Medicare!
  • We are finally spending enough to cover the needy!

The commentary was frustrating and not very instructive. With important exceptions, it also was surprisingly uncritical of the BEA report—taking the 10% figure as gospel. So let’s dig into exactly what the BEA said and how it corresponds, or doesn’t correspond, to other evidence. First, the April 30 “advance estimate” was just that—a first-blush figure based on fragmentary data. On May 29, the BEA’s second figure, or “preliminary estimate,” revised health spending growth downward from 10% to 6.1%; on June 25 we’ll get the “final estimate.” History shows that the numbers can move around quite a bit in the march from “advance” to “final.” Second, these numbers show the clear, predictable and mostly one-time impact of insurance coverage expansion through the Affordable Care Act (ACA). Indeed, the BEA’s own data show that health care prices remained at a low 0.5% inflation rate while virtually all of the increase in spending was attributed to higher utilization, the product of pent-up demand among the newly insured. Third, one data point does not a trend make. The first quarter results were striking, but at Sg2 we work hard not to be swayed by quarter-to-quarter swings. Show us two quarters and we’ll start paying attention; show us three and we’ll consider whether there’s evidence to support a trend.

So what’s really happening? To be certain, health care spending in the US remains high and is rising by any reasonable global measure. The Milliman Medical Index for 2013 calculates that $23,215 is spent in total on health care for the average American family of four covered by an employer-sponsored plan. That’s equivalent to buying a brand-new Ford Escape in January, and driving it off a cliff at year’s end. That figure is still rising—by 5.4% last year according to Milliman—but at a rate slower than any since at least 2002. A similar story is told by the broader metric of national health expenditures (NHE)—which accounts not just for what you and I spend on personal health care but also what the industry spends on IT, construction, research and the like. Until recently, year-over-year growth in NHE remained at 60-year historical lows, below 4%. But that started to change mid-year 2013, and there’s evidence that NHE growth has accelerated toward 7% in early 2014. We’re seeing the impact of a long, drawn-out economic recovery, coupled with early insurance coverage expansion. The reasonable debate is over how far it will go.

Is the BEA report an indication that we are headed back to the double-digit health spending growth we experienced for long stretches of the 1970s, 1980s and 1990s? Sg2’s take is a firm “No.”

We are far more concerned about the microeconomic issues we see in local markets:

  • The new bad debt arising from high deductibles and co-pays
  • The loss of disproportionate share payments in non–Medicaid expansion states
  • On-the-fly changes to the ACA, such as the new guidance on hospital subsidization of exchange premiums and the IRS’s ruling on “employer dumping”
  • Site-neutral payment
  • The impacts of price transparency, reference pricing and bundling

What’s more, the growth projected for health care will not be found in hospital-based care. Through the first quarter of 2014, same-store admission trends remained in the –2% range, according to Citibank’s monthly survey of hospitals. We stand by our –3%, 10-year national forecast for inpatient discharges. But, as a provider, take heart due to the subtle volumes lift and payer mix improvement that the ACA promises to bring. And be mindful of the many greater forces that weigh against this rising tide. There is growth to be found in health care! We are seeing growth in many markets that takes many forms.

The growth opportunities lie in all the areas that are poised to disrupt incumbents—outpatient alternatives to inpatient services, virtual and retail alternatives to the office visit, new entrants riding the wave of price transparency. The health care economy growth rate will not stay below 4%, but we’re not going back to a sustained double-digit inflation rate either.

The media is going to get the story wrong some of the time; it’s our job to ensure that the right message gets to our communities. At Sg2, we believe if you focus on building your System of CARE and dig deeper into the clinical services and sites of care detailed in your localized Impact of Change® forecast you will seize the growth that is available to you. You need to think harder about where to meet patient demand, through what mix of in-person and virtual channels, on how short a notice, and at what price.

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As of February 11, 2016, Vizient, Inc. has completed its purchase of MedAssets Sg2 and spend and clinical resource management segments from Pamplona Capital Management, LLC. MedAssets revenue cycle business will continue to operate as a wholly-owned subsidiary of Pamplona Capital Management LLP.

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