Health Care Spending and Providers: Storm Clouds Ahead

In late August and early September, two budget reports by the Congressional Budget Office (CBO) and the Centers for Medicare and Medicaid (CMS) Office of the Actuary estimate slow growth in health care spending in the short term and growing spending thereafter. Both agree that over the long term, health care spending will grow due to greater health insurance coverage under the Affordable Care Act (ACA) and a growing presence of us Baby Boomers.

CBO’s An Update to the Budget and Economic Outlook projects the Fiscal Year 2014 federal budget deficit at $506 billion, $170 billion below the previous fiscal year. But over the next 10 years, annual federal budget deficits are expected to grow to $960 billion despite a growing national economy. Health care programs and retirement as the result of an aging population, along with rising interest payments on the federal debt, are the deficit drivers.

Health care spending will grow nine percent, or $67 billion, in 2014, according to CBO. While Medicare spending will grow modestly over the next half decade, the next five years will see greater growth due to an aging population. Medicaid spending is expected to grow as more states opt to expand Medicaid coverage under provisions of the ACA. Spending for health insurance subsidies under the health exchanges is expected to grow.

Medicare payments to physicians, the Sustainable Growth Rate (SGR), are projected to be reduced by 24 percent on April 1, 2015. Assuming a minimum congressional response, this will not happen. There is bicameral agreement on the necessary permanent policy change but not on how to pay for the change. CBO projects a 10-year SGR freeze at $131 billion, which would add about 2 percent per year to Medicare spending.

Meanwhile, the CMS Actuary projects health care spending will grow at about a 5 percent annual rate for 2016 to 2018, above an expected 4.7 percent annual GNP rate. As with CBO, the CMS Actuary predicts Medicare spending will grow at an average rate of 7.9 percent for 2019-22. Spending for hospital services, estimated at 4.9 percent in 2012, is expected to grow 6.4 percent annually, 2016-22. Physician and clinical services spending is estimated at 4.6 percent in 2012, but will accelerate to 7.1 percent in 2014. Annual increases of 5.5 percent for 2015-18 and 6.6 percent during 2019-22 are anticipated.

Spending on prescription drugs actually declined in 2012, but is expected to accelerate through 2022.

With health care spending as one of the drivers increasing federal budget spending and a larger deficit, health care providers will fall increasingly under the budget microscope. The result will likely be congressional action leading to greater reductions in service reimbursements. Congress has historically demonstrated it will not look to Medicare beneficiaries and other health care consumers to share a greater burden in their health care costs, although this has occurred in the private sector. It has, however, not hesitated to shave provider reimbursements when seeking to reduce overall health care spending and the budget deficit. Nothing on the political horizon suggests that will change. All providers will feel the squeeze to be more efficient and to deliver greater quality.

In August, Moody’s Investors Service stated nonprofit hospital revenue growth and cash flow margins reached an all-time low in fiscal year 2013. Revenue growth was 3.9 percent, down from 5.1 percent in 2012. Moody’s said the Affordable Care Act individual mandate and Medicaid expansion in some states will likely “mitigate” the expected 2014 slowdown, but it won’t be felt until 2015.

The combination of Federal policymakers wanting to reduce provider spending and private sector pressure will be felt the most by freestanding hospitals and small group or single physician practices. They will either have to find partners or simply cease to exist. Either way, change is coming, and fast. Storm clouds are coming.

Julius W. Hobson, Jr. is Senior Policy Advisor at Polsinelli P.C. and Adjunct Professor of Political Management, Graduate School of Political Management, George Washington University, where he teaches courses on Lobbying, Electoral and Legislative Processes, and Legislative Writing and Research.


Morning Consult