Trends In U.S. Healthcare Spending And The Direction Of Managed Care by Harlan Sonderling, Columbia Threadneedle Investments

  • Structural changes in healthcare delivery and consumer options are leading to aligned incentives for better health outcomes and slower cost growth.
  • Total healthcare spending growth is positive for providers of all kinds, while subdued per capita spending is positive for health insurers.
  • Healthcare companies that lead in productive innovation have significant market advantages that can yield productive investments.

Bottom line: Despite what one reads in the popular press, structural changes in healthcare delivery and consumer options – within both managed care (payers) and hospitals and caregivers (providers) – are leading to aligned incentives for better health outcomes and slower cost growth. Healthcare companies can do well by doing good.

The Centers for Medicare and Medicaid Services (CMS) released data last month on 2014 national healthcare spending, along with a forecast through 2024 (Exhibit 1). The data show that 2014 total spending rose by 5.5% to $3.08 trillion, up from 3.6% and 4.1% increases in 2013 and 2012, respectively, though well below the 9% historical average. Reasons for the 2014 spending increase include insurance coverage expansion to 8.4 million previously uninsured people under ACA (19% fewer uninsured), economic growth, the aging population, availability of new specialty drugs like the hepatitis C cures, and drug price inflation. In fact, 2014 prescription drug spending rose by 12.6%, its highest rate since 2002. Between 2014 and 2024, healthcare spending is projected to increase by 5.8% annually, and from 17.4% of GDP to 19.6% for similar reasons.

Exhibit 1: National healthcare spending is expected to increase

National health expenditures (NHE), amounts and annual growth from previous year shown, by spending category, calendar years 2007–24

U.S. Healthcare Spending

Sources: Centers for Medicare and Medicaid Services, Office of the Actuary, National Health Statistics Group

Notes: Definitions, sources, and methods for NHE categories can be found at CMS.gov. National Health Expenditure Accounts: methodology paper, 2013: definitions, sources, and methods [Internet]. Baltimore (MD): Centers for Medicare and Medicaid Services; 2014 [cited 2015 Jul 2]. Available here. Numbers may not sum to totals because of rounding. Percent changes are calculated from unrounded data. Annual growth, 1990–2007.

Most importantly, however, per capita spending is declining due to increased adoption of high-deductible insurance plans, enrollment of healthier individuals in public insurance exchanges, and expansion of Medicaid managed care. Putting these facts together leads to the conclusion that total healthcare spending growth is positive for providers of all kinds, while subdued per capita spending is positive for health insurers.

Digging deeper into insurers, managed care is evolving from an employer-directed to a consumer-directed retail market and from a defined benefit to a defined contribution model, one in which the consumer is financially incented to make better decisions using online information on hospitals’, doctors’ and other providers’ costs and quality. Providers, in turn, are forming accountable care organizations (ACOs), aligned networks that manage overall patient care rather than sell individual exams and procedures. This model inherently promotes patient wellness. The old market-share game of managed care companies seeking discounted rates in return for volume is evolving toward consumers directing their own subsidized funds toward better values and outcomes. The migration to individual health insurance distribution over the internet pressures traditional brokers, as well as the benefits consultants who have long guided large health insurance plan sponsors.

As a natural consequence of managed care companies contracting with integrated provider groups, these providers will consolidate, as, for example, hospitals and management companies have been acquiring physician practice groups. Managed care and provider groups thus provide value to each other, and both to the patient. Providers increasingly appear to be capable of managing “population health,” helped along by financial incentives and better technology. Insurers, too, will use technology to inform patients on procedure costs, provider quality metrics, and even recommended treatment options. The implications for healthcare outcomes and the annual rate of per capita healthcare cost inflation are profound. Think of the benefits of reducing unnecessary procedures, improving patient compliance, and incenting providers to deliver appropriate care. In turn, pharmaceutical and medical device manufacturers will need to develop more value-based marketing messages to their provider customers, and software providers will be challenged to develop easier consumer interfaces.

The pace of change in healthcare delivery is accelerating, and the direction is generally good. Healthcare companies that lead in productive innovation have significant market advantages that can yield productive investments.