Health Care Cost Inflation Returns

True, that....

Call it the return to the old normal.

With the slow recovery of the U.S. economy, the advent of some blockbuster drugs and the entry of more than 8 million newly-insured persons, healthcare cost inflation is ticking back up. Writing in Health Affairs, CMS' actuaries are projecting a 5.8% year-over-year rate of inflation that reminds them of the years prior to the Great Recession. This rate is projected to grow faster than the Gross Domestic Product (GDP), which means that by 2024, the U.S. will be devoting 19.6% of its economy to healthcare.

Some eye-catching observations:

1) If it weren't for consumer cost-sharing, the inflation rate would be even higher;

2) Drug treatment for a single disease - Hepatitis C -  is driving prescription drug costs "sharply higher" and adding to the overall 5.8% rate;

3) No mention of the impact of the administration's innovations, like accountable care organizations;

4) Substantial uncertainty.

The Population Health Blog's take:

In a highly competitive global economy, even single point increases in healthcare costs underlying the manufacture of items that make up the GDP, automobiles or washing machines, is bad news.  If the projections are true, business leaders could reconsider the merits of overseas outsourcing or start dropping employer-based health insurance.

Costs in 2015 and 2016 will be lower than the 5.8% rate, which means it won't hurt enough to make healthcare a big factor in the 2016 elections.  While the Affordable Care Act remains a rhetorically rich target environment, the PHB expects politicians on both sides of the partisan divide to find better red meat elsewhere, like building thousand-mile walls or buying hundreds of millions of solar panels.  So, if you're an investor in healthcare stocks, continue to go long.

Any good news in other sectors of the economy could paradoxically make healthcare costs look comparatively worse. As energy and housing costs creep along at a lower rate, consumers are going to see a greater percent of their income going toward healthcare - either in the form of health insurance premiums or out-of-pocket cost-sharing.  If (and that's a big if) the U.S. economy can return to its efficient cost-cutting ways, expect the healthcare debate to heat up and for calls for a government-sponsored option to increase. 

The mean increase of 5.8% is an average.  Some segments of the insured population will see higher costs and others will see lower costs "around" the mathematical mean.  Which voter block "loses" by paying more than the 5.8% could drive the coming debate as it shifts from insurance coverage to affordability and access.  Case in point: the PHB's spouse is registered to vote and she's not happy with the guesswork behind our pricey monthly insurance premium.

While Americans have reasons to be reluctant to travel overseas for cheaper surgery, they'll be far less so for access to a course of just-as-good medications that are under foreign price control.  Call it medication tourism.

And finally.... uncertain abounds.  No one saw that Hepatitis C would have such a near-term impact.  Who knows what else is out there?  A new epidemic?  Another cure?

Stay tuned!