Health Care Spending Spikes: Why?

You may have read that health care spending in the private sector picked up both in the fourth quarter of 2013, and during the first two months of this year. Recent data from the Bureau of Economic Analysis (BEA) show that during the last three months of 2013 spending on health care rose at an annual rate of  5.3%  The trend continued this year, with spending climbing 6.2%, on a year-over-year basis in January, and 6.7% in February,

This came as a surprise. Since December of 2007, after adjusting for inflation, health care outlays have been rising by only 2.6%  As former CBO director Peter Orszag observed in a Bloomberg column published yesterday,  “the sudden jump has led some some commentators to declare an end to the era of slower health-cost increases, which has lasted for the past several years. ”  Yet, Orszag notes, “Medicare spending growth is still low, even through last month. Indeed, in the first half of this fiscal year, nominal Medicare spending was only 0.6 percent higher than in the corresponding period a year earlier.”

Why have outlays risen for those under 65, but not for seniors?  BEA suggests that the jump during the first two months of this year reflects the fact that, thanks to the Affordable Care Act (ACA),  more Americans had comprehensive insurance that gave them access to a wide range of services.

Those who became insured in January and February are the folks who signed up at the very beginning of the enrollment period. No doubt many of them had been postponing needed care for a long time. As soon as they were covered, they began visiting doctors, scheduling elective surgeries, and filling prescriptions.

Going forward, won’t the fact that more Americans are insured mean that health care spending will continue to rise? Yesterday, the Congressional Budget Office (CBO) released a report that said “No.” The ACA will cost about $1 billion less than originally projected, the CBO reported, even though we will be covering more people. This is largely because premiums on the Exchanges turned out to be lower than expected.