President Obama signed the Affordable Care Act (ACA) into
law on March 23, 2010. Since then, the health care industry has focused its attention
and energies on the supply side of
the health care economic equation (e.g., where care is provided, by whom, how
its reimbursed). We should pay greater
attention to the demand side of the
equation (who needs what types of care, how much). As I will illustrate, several immutable
factors will lead to explosive growth in demand that could extend for decades. Unless
we understand these forces, our efforts to better manage the supply side will
be inadequate.
I will address three of these immutable forces:
- Relationship of changes in health care spending to economic growth and inflation
- “Uber-“aging of the population
- Ticking time bomb of chronic conditions among these elderly
Relationship of
changes in health care spending to economic growth and inflation
Clearly, industry participants have undertaken myriad
efforts over the years to contain health care cost increases. Value-based payments, high deductible health
plans (HDHPs), accountable care organizations (ACOs), as well as
organizational-level business model changes, product standardization, mergers,
etc., have been designed to lower the rate of expenditure growth. Proponents
sold ACA’s passage on the promise of “bending the curve” of growth in health
care costs. These same proponents argue
that the relatively low annual expenditure increases since 2008 (at least by
historical standards) are prima facie
evidence of the success of these efforts.
However, research conducted jointly by the Henry J. Kaiser
Family Foundation and Altarum Institute’s Center for Sustainable Health
Spending suggests that these efforts may only have minimally contributed, at
best, to slowing the rate of annual increase in health care costs (Kaiser,
April 22, 2013). Kaiser and Altarum studied
health expenditure data for the period 1965 to 2012, available via the Office
of the Actuary in the Centers for Medicare and Medicaid Services. Despite literally decades of industry-wide, regulatory
and organization-specific cost containment efforts,
Kaiser and Altarum
researchers found that fully 85% of the variation in health care expenditures
could be “explained” by just two factors:
·
- Inflation in the current year, as measured by the Gross Domestic Product (GDP) deflator, as well as inflation in the prior two years.
- The growth in real GDP in the current year, as well as GDP growth in the prior five years.
Perhaps our efforts have not bent the cost curve. From the Kaiser
analysis, we can conclude that the now 7-year slowdown in health care expenditures
resulted from the economic recession of 2007 and slow subsequent recovery, along
with on-going Federal Reserve efforts to control inflation. The industry’s cost
containment efforts, by extension, seem to have had limited impact on slowing
the long-term rate of expenditure growth. Drawing on Kaiser and Altarum’s
research, health expenditure growth will likely accelerate, once more robust
recovery occurs, and inflation returns to historical levels.
“Uber-“aging of the
population
Look, we all know the impact of an aging population, as baby
boomers reach the age of Medicare eligibility.
Or do we?
We understand that persons over 65 years of age use
substantially more health care services than the non-elderly – about 2- 3x as
much (Health
Affairs, January 1993). About 11,000 persons become eligible for Medicare
every day (per former HHS Secretary Kathleen Sebelius, cited in cbsnews.com,
June, 2012); and the U.S Census Bureau projects 28 million more senior
citizens in 2030 than in 2014, These
aging baby boomers represent a significant tailwind for increased health care
expenditures for the foreseeable future.
Yet, that doesn’t tell the full story…
The oldest baby boomer is “only” 69 years old; the youngest,
51. Here’s where the challenge becomes even more apparent: According to another analysis conducted by the
Henry J. Kaiser Family Foundation (Kaiser,
January, 2015), traditional Medicare spending per capita rises with every
year of age, peaking at age 96. Indeed,
per capita spending at age 96 is nearly 3x what it is at age 65!
So, while baby boomers are attaining the age of
Medicare-eligibility, we are only at the front-end of the curve of increased
use rates by age cohort. We can expect
that aging combined with the increased use rates among the very old, will serve
as a tailwind on health care expenditures until the wave of these baby boomers are
well into their senior years (another 3 ½ decades for the median age boomer).
Ticking time bomb of
chronic conditions among these elderly
Obesity, hypertension, diabetes, high blood pressure, heart
disease, heart failure, high cholesterol -
chronic health conditions are reaching epidemic levels in the U.S. This is a particular issue among the elderly
and is a notable contributor to the health care cost challenge cited above. Again,
we may only be seeing the beginning of a long-term increase in demand for
health care, particularly from chronic conditions among the elderly.
In its report “Chronic
Conditions Among Medicare Beneficiaries, Chartbook: 2012 Edition”, the
Center for Medicare & Medicaid Services (CMS) highlighted this
challenge: First, the incidence of multiple
chronic conditions increases with age: At age 65-74, 37% of the population have
0 or 1 chronic conditions, another 34% have 2 or 3; only 9% have 6 or
more. At 75-84 years ago, only 23% have
0 or 1 conditions; and the number that have 6 or more doubles to 18%. Over 85
years of age, 25% have 6 or more chronic conditions, and another 29% have 4 or
5.
Not surprisingly, use of healthcare services, both acute and
non-acute, increase with the number of chronic conditions: only 4% of persons
with 0 or 1 conditions experience an inpatient admission, while 30% of persons with
4 or 5 conditions and 63% of those with 6 or more conditions experience an
inpatient admission each year. Similar
patterns occur with ER, home health and physician visits.
The telling indicator is how number of chronic conditions effects
per capita spending among Medicare fee for service beneficiaries: average annual
spending for persons with 0-1 conditions was $2,025; for 2-3 conditions, $5,698;
for 4-5 conditions, $12,174; and, for 6 or more conditions, $32,658!
Summary
We may be experiencing just the beginning of a
sustained – decades-long – period of accelerating demand for health care
services. It will be ignited by a long-anticipated economic recovery and an
inevitable return to inflation. It will
be fueled by an aging group of baby boomers, with increasing incidence of
multiple chronic conditions. The health care industry can anticipate a greater increase
in the demand for services than we have experienced since Medicare and Medicaid
were introduced in the 1960s. Are we prepared? Are the regulatory and payment
mechanisms in place to address this demand without bankrupting the
country? Are companies’ business models
in tune with the nature of the demand, especially in the treatment of chronic conditions
v. the current emphasis on acute care?
Next blog: Performance of Largest Medical Device Companies
Following Health Reform
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