Are health care costs skyrocketing, or not? It depends on who you ask

BY Jay Hancock, Kaiser Health News  August 4, 2014 at 10:58 AM EST

Photo illustration by Getty Images

Photo illustration by Getty Images

Analysts who fear health spending is accelerating got plenty of evidence in Wall Street’s second-quarter results to support their thesis. But so did folks who hope spending is still under control.

Now everybody’s trying to sort out the mixed message.

The answer matters because deficit debates and affordability concerns revolve around forecasts that health spending will speed up as the economy revives. If it doesn’t, the future looks better for consumers, employers and taxpayers.

To hear hospitals tell it — based on earning reports issued over the last two weeks — we might be heading back toward the painful, 8 percent spending increases of the early 2000s. (National health spending rose only 3.7 percent in 2012, the most recent year for complete results.)

Thanks to expanded coverage from the Affordable Care Act that began in January, “we have seen higher utilization rates than maybe we originally anticipated,” William Rutherford, chief financial officer at the hospital chain HCA Holdings, told stock analysts last week.

HCA’s admissions rose after declining in the previous two quarters. Revenue increased 5 percent, and the company raised its profit forecast.

Tenet Healthcare, another hospital chain, booked its best quarter in six years for admissions covered by private insurance. Inpatient revenue at Universal Health Services’ general hospitals popped 12 percent. Most hospital stocks are up more than a tenth since earnings season began.

So the insurance companies who pay for all this must be getting killed, right? Not exactly.

“Medical cost trends continue to be moderate,” Aetna’s chief financial officer said last week. Cost increases at WellPoint for the second quarter stayed close to a tame 6 percent, the company says. It doesn’t see that changing soon.

“Our underlying cost trends remain very well controlled,” UnitedHealth Group’s top financial officer told analysts. Cigna even lowered its cost outlook, projecting an increase for 2014 of 4.5 percent to 5.5 percent.

What’s going on?

Part of the apparent contradiction is that health plans focus on per capita, not total costs, says Ana Gupte, who follows insurers for Leerink Partners, an investment house.Part of the apparent contradiction is that health plans focus on per capita, not total costs, says Ana Gupte, who follows insurers for Leerink Partners, an investment house. “Moderate” expense increases for an insurer means moderate per member — even if thanks to the ACA insurers have many more members than they did a year ago.

That new membership is why hospitals “are getting new patients from Obamacare, and they’re getting it in spades,” Gupte said in an interview.

But somebody is paying for the expanded coverage: federal taxpayers, through subsidies for private insurance bought online and direct payments for expansion of the Medicaid program for low-income consumers.

To a smaller extent, employers are also probably getting billed for hospitals’ revenue gains, as economic improvement means more people have jobs and employer-sponsored coverage.

Does this mean national health spending is off to the races? Not necessarily.

Part of the second quarter’s volume surge looks like pent-up demand from the previously uninsured, analysts say. That may not last.

And not all the billions spent on Medicaid expansion and insurance subsidies are net new money to the system. The ACA partly compensates for those additional dollars by cutting federal support for hospitals to care for the poor and seniors.

The law also includes readmission penalties and other efficiency incentives that should reduce hospitals’ future revenue. The Labor Department estimates hospitals cut 7,000 jobs in July, suggesting they feel financial pressure.

Even so, health spending in the second quarter looks a lot stronger than it did over the winter, when bad storms helped shrink the whole economy.

One after another in recent days, insurers reported higher ratios of medical expenditures to second-quarter premiums even as they reassured investors about cost trends.

That’s not very persuasive evidence that costs will stay on track, especially since health plans don’t have a good record of predicting spikes, says Citigroup analyst Carl McDonald.

In a note to clients he writes: “It’s hard to correlate plan comments on slowing [cost] trend with the recent commentary from some providers that underlying volumes are rising for the first time in years.”


Kaiser Health News is an editorially independent program of the Henry J. Kaiser Family Foundation, a nonprofit, nonpartisan health policy research and communication organization not affiliated with Kaiser Permanente.