Last Wednesday, the Centers for Medicare & Medicaid Services Office of the Actuary released its forecast of national health care spending, concluding that health spending growth in 2013 “is expected to have remained slow, at 3.6 percent … but the combined effects of the Affordable Care Act’s coverage expansions, faster economic growth and population aging are expected to fuel health spending growth this year and thereafter (5.6 percent in 2014 and 6 percent per year for 2015–23).” Actuaries noted that the 3.6 percent annual growth in spending was the fifth consecutive year of less than 4 percent annual growth, attributing the slowdown to the combined impact of a tepid economic recovery that reduced utilization and the ACA’s downward pressure on prices.

This report followed two other government reports released in the previous two weeks:

The Department of Commerce reported about consumer spending for the second quarter, showing increased pressure on household pocketbooks. Its highlights:

  • Real personal consumption expenditures increased 2.5 percent, while real disposable income grew by 1 percent.
  • Household spending declined 0.1 percent in July.
  • Personal income (income from wages, investment and government aid) rose 0.2 percent — the lowest monthly increase this year.
  • The gross domestic product contracted to an annual rate of +2.1 percent.

And the Congressional Budget Office updated its budget forecast, concluding …

  • The deficit for fiscal 2014 will be $506 billion, an increase from the CBO’s April forecast of $492 billion (fiscal 2013 actual: $680 billion).
  • The GDP will grow by 1.5 percent in 2014, a downward estimate from the CBO’s April forecast of 2.6 percent.
  • Annual net outlays for all the government's major health care programs will increase 85 percent in 10 years. Spending on the federal government's major health care programs, net of offsetting receipts, will increase from 4.9 percent of GDP in 2014 to 5.9 percent of GDP in 2024.
  • In the current fiscal year, 2014 (which ends Sept. 30), net spending for Medicare will increase 2 percent, but spending for Medicaid will rise 15 percent, primarily as states expand Medicaid eligibility under the Affordable Care Act.

So, what do these numbers really mean, especially to hospitals and health systems that have seen average operating margins shrink to 2.1 percent in 2013 from 2.5 percent in 2012?

First, it means hospitals face tough negotiations with health insurers, who will use the ACA’s trajectory from fee for service to performance-based payments to providers to aggressively expand bundled payment programs and use narrow networks and reference pricing to garner better deals for their enrollees.

Second, it means consumers increasingly will shoulder more of the burden of health costs directly, through premiums, co-payments and deductibles, accelerating price sensitivity for hospital and physician services, and increasing bad debt as their bills go unpaid.

Third, it means large employers will become more active as purchasers, seeking opportunities to contract directly with providers who can accept risk for high-quality, low-cost guarantees.

Fourth, it means operating margins for doctors, hospitals and post-acute providers will shrink, accelerating vertical integration into care management organizations that focus on scale, growth and diversification.

And last, it means the gap between household income gains that are substantially lower than health care spending — 5.6 percent per year — will spark a renewed public debate about the sustainability of the U.S. health system as it currently operates. The disconnect hits younger households hardest: the millennials and young Gen Yers might start an “occupy health care” movement to replace the current system with something else.

The government’s data clearly point to the reality that health care is a significant element of our economy; as such, it is not insulated from the realities of our marketplace. If health care becomes 20 percent of the GDP in our economy as predicted by the actuaries in this report, will it do so on the backs of fewer and fewer privately insured patients (consumers) and employers that provide the bulk of its profits, or will these stakeholders cry uncle and look to reset the health system altogether?

What’s clear from these reports is this: If health spending soars back to 6 percent annual growth, there will be winners and losers in each segment of the industry. Some hospitals and health systems will be too big to fail, and many too small to scale.

Paul H. Keckley, Ph.D., a health economist and expert on U.S. health reform, is managing director at the Navigant Center for Healthcare Research and Policy Analysis. His H&HN Daily column appears the first Monday of every month. He is a member of Health Forum's Speakers Express. For speaking opportunities, contact David Parlin.