Hospital Spending to Accelerate in Coming Years: CMS

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

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

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

The annual projection also concluded national health expenditures will increase at an average annual rate of 5.5 percent from 2018 through 2027, which it will comprise 19.4 percent of the gross domestic product.

The coming increases in hospital spending compared to expected 6.1 percent average annual increase in drug spending from 2020 through 2027, and 5.4 percent annual increases in physician and clinical services spending.

The coming spending increases for hospitals also are greater than those organizations have seen in recent years. Hospital spending increased 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 and 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,” said the report. The 2017 federal tax overhaul set the individual mandate tax penalty to zero beginning in 2019.

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

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

That compared to an expected average annual price increase 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 2008 recession and hospital employee labor markets have continued to tighten.

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

The wage pressure also will stem 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 healthcare 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.

Hospital spending increases will be constrained in part by Medicare payment updates that are reduced by growth in economywide productivity, which is projected to accelerate in coming decade.

Price growth for physician and clinical services, which has remained near historically low rates in recent year, was expected to be continued by practices using more nonphysicians to provide care,  which was credited with increasing productivity and profits even in the presence of slow price growth.

A factor contributing to the 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,” said the report. “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.”

A factor that could limit future productivity increases from substituting physician care within physician practices was 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 health care spending growth will average 5.5 percent, with about half of that driven by economy-wide and other price inflation. Such inflation is expected to overwhelm factors that in recent years have slowed price increases in recent years, including price sensitivity by consumers and insurers—especially from cost sharing, selective contracting by insurers, 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 are being overwhelming by countervailing economic pressures.

“Accelerations and decelerations in income growth can influence the degree to which, 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