Health care spending growth hits 10-year high

Health care spending rose at the fastest pace in 10 years last quarter, a development that could foreshadow higher costs for consumers this year.

Expenses for health care rose at a 5.6% annual rate in the fourth quarter, the Bureau of Economic Analysis said last week. The jump triggered a sharp upward revision in the government's estimate of consumer spending overall and accounted for nearly a quarter of the economy's 2.6% annualized growth in the last three months of 2013.

Driving the increase was an $8 billion rise in hospital revenue — more than the previous four quarters combined, according to the Census Bureau and Royal Bank of Scotland. RBS economist Omair Sharif says the increase in hospitals' income was puzzling because the number of inpatient days dipped 1% during the fourth quarter.

The increase is a marked change from slow-growing rates of health care prices and spending in recent years. Many unemployed Americans went without health insurance or limited their spending during the recession and sluggish recovery, says Dan Mendelson, CEO of consulting firm Avalere Health.

Also, the 2010 Affordable Care Act gave incentives to hospitals to become more efficient and limit patient readmissions. Insurance companies increasingly have shifted costs to patients through high-deductible plans and other measures, prompting Americans to limit visits to doctors and hospitals, he says.

But those trends may be leveling off, and long-term upward pressures on health care costs, such as the growth of expensive high-tech treatments, are re-emerging, Mendelson says.

Meanwhile, the economy is picking up. Since late 2011, employers have added 2.6 million jobs, and the unemployment rate has fallen from 8.5% to 6.7%.

"The improved economy could result in individuals having the resources to spend on health care services," American Hospital Association spokeswoman Jennifer Schleman says of the fourth-quarter jump in hospital revenue.

The Affordable Care Act's mandate for Americans to have health coverage this year or pay a penalty will fuel further spending increases this year, says George Miller, a fellow at the Altarum Institute's Center for Sustainable Health Spending. The Centers for Medicare & Medicaid Services expects health spending to rise 6.1% this year, up from about 4% in 2013, as an estimated 11 million Americans gain health insurance.

What consumers pay for health care also may edge higher. Annual medical inflation has drifted down since the recession and was at a 50-year low of 0.9% in January, according to Capital Economics. But the decline was partly due to the expiration of a large number of drug patents in 2011 and 2012, causing expensive branded drugs to be replaced by cheaper generics.

With fewer patents expiring the next two years, "most of this fall in drug inflation will be reversed," says Paul Dales of Capital Economics.

Dales counts that among the factors that should push annual health care inflation to 2.5% during the next two years and nudge overall inflation, excluding food and energy costs, above the Federal Reserve's 2% target as early as next year. That could prompt the Fed to raise interest rates sooner than expected in 2015, he says.

Not everyone believes higher health care spending and prices are coming. Larry Van Horn, executive director of health affairs at Vanderbilt University's Owen Graduate School of Management, says the shift of the cost burden to patients will continue to drive down medical expenditures.

"I think we have a long way to go," he says.