Skip to main content

Healthcare Cost Growth Slows but Easily Outpaces Inflation

 |  By John Commins  
   November 20, 2012

The average growth in per capita cost of healthcare services slowed over the past year by nearly 0.7%, but the overall pace of that growth continues to easily outstrip inflation in the larger economy, according to Standard & Poor's Healthcare Economic Indices.

For the 12-month period ending in September, S&P reports that the average per capita cost of healthcare services covered by commercial insurance and Medicare programs rose by 5.06%—a slight deceleration from the 5.7% annual growth rate recorded in August.

Inflation in the overall economy was 2% for the same 12 months, as measured by the Consumer Price Index.

David Blitzer, managing director and chairman of the Index Committee, S&P Dow Jones Indices, says the decelerating healthcare cost growth is likely due to the continuing sluggish economy.

"I don't see specific health-related stuff that is national in scope to have this impact," he says. "It is still too soon for most of the 'Obamacare' stuff coming along. There may be some peculiar shifts because we've changed the age composition of people covered, because we now cover students up to the age of 26. So in some areas there could be some strange effects. The average age of that covered population in commercial insurance comes down and therefore the average health goes up. But at the same time, the kind of injuries is probably going to change, too. Bring the age down and you raise the proportion of young adults who have automobile accidents proportionately ... and you have less chronic illness than you used to. But I don't think any of that is big enough in a macroeconomic scale."

The indices show that healthcare costs covered by commercial insurance plans increased by 7.05% over the year ending in September, down from the 7.81% annual increase reported for August. Medicare claim costs growth slowed to 2.04%, compared to 2.48% in August.

Blitzer says the sputtering economy may be depressing volume for elective procedures.

"In a weak economy and with people concerned about job losses, there is some downward movement in elective treatments," he says. "If someone is afraid of losing their job, do they get the elective work done right away, or do they delay it because they want to be seen in the office and they don't want the boss to put them on the wrong list?"

"The other thing that shows up in a weak economy and low inflation is that salary and wage increases will be less than otherwise," he says. "When hospitals set their salary standards and the inflation rate is 2%, they aren't going to hand out 10% across-the-board raises. They probably would bargain harder for anything they buy from vendors, from aspirins to MRI machines, because money is a little tighter and they are concerned about where the next dollar is coming from."

All nine S&P Healthcare Economic Indices posted decelerating annual growth rates in September. Professional Service Medicare and the Hospital Index posted their lowest annual rates since January 2005. The Hospital Commercial Index hit a new recent low with an annual growth rate of 5.12%—its lowest since May 2010. The Professional Services Index annual growth rate was 6.13% in September 2012, down from the 6.67% August 2012 level. The Hospital Index's growth rate fell to its seven-and-a-half year historic low of 3.84% in September, from 4.54% recorded in August 2012.

Blitzer says that, given the peculiarities of healthcare today, it is unlikely that the sector's cost growth will be brought in line with the CPI anytime soon.

"On a grand scale kind of thing, there are two difficulties that healthcare faces," he says. "One is [that] most people, when they go to the doctor, are not informed customers with easy freedom to go buy another product. You don't have the option to go across the street, and most of us don't know the difference."

"The other problem is that delivering healthcare is tied to labor, and that is very hard to reduce," he says. "We tried to do that a little with healthcare, where physicians' assistants replace physicians and nurses replace physicians' assistants, and so forth. But it is very difficult to squeeze down the labor component or to raise the labor productivity enough."

"That's the long-term problem—getting labor productivity gains," he adds. "We are trying to do some things. The average hospital stay has been dramatically reduced from 20 years ago, [for] one example. Another is things like laparoscopic surgery. But there's an extent to which you can do these things. So, I would love to be optimistic but I think we are stuck with a margin of a few percentage points above the general rate of inflation for healthcare. It's not because people are getting cheated. There is no evil element to this. It is just a fact of life."

The S&P Healthcare Economic Indices estimate the per capita change in revenues accrued each month by hospital and professional services facilities for services provided to patients covered under traditional Medicare and commercial health insurance programs. The annual growth rates are determined by calculating a percent change of the 12-month moving averages of the monthly index levels versus the same month of the prior year.

Healthcare costs began to accelerate in May 2009 and peaked in May 2010, before decelerating through the first half of 2011. An acceleration trend began again in October 2011 but tapered slightly in June 2012.

In 2011 S&P reported that the average per capita cost of healthcare services covered by Medicare programs and commercial insurance grew by 5.28%, including 7.11% for commercial insurance plans and 2.51% for Medicare.

Pages

John Commins is a content specialist and online news editor for HealthLeaders, a Simplify Compliance brand.

Tagged Under:


Get the latest on healthcare leadership in your inbox.