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December 11, 2018

'Unquestionably good news': Why US health spending slowed for the second straight year

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    U.S. health spending growth slowed in 2017 as the demand for medical services and gains in health care coverage declined, according to a CMS report released Thursday.

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    The report, by CMS' Office of the Actuary, is widely viewed as the authoritative breakdown on health care spending in the United States.

    National health expenditure findings

    Overall, the actuaries found national health spending increased by 3.9% to $3.5 trillion in 2017, a decline from growth rates of 5.1% in 2014, 5.8% in 2015, and 4.3% in 2016. The actuaries said the 3.9% growth rate was more in line with moderate growth levels seen just after the 2007-2009 economic recession.

    Anne Martin, an economist at CMS' Office of the Actuary, said, "The relatively low rate of health spending growth in 2017 was similar to the average annual growth during 2008-13, which predated the major coverage expansions" under the Affordable Care Act (ACA).

    The actuaries found that health spending growth in 2017 did not outpace spending growth for the overall economy, which measured 4.2% in 2017. As such, health care expenditures in 2017 accounted for 17.9% of the nation's total gross domestic product—a share comparable to 2016.

    Reasons for the slowdown

    The actuaries attributed the slowdown in health spending growth to a reduction in the use and intensity of health-related goods and services, including hospital care, insurance, physician and clinical services, and retail prescription drugs.

    For example, total hospital spending, which accounted for 33% of total health care spending in 2017, grew by 4.6% to $1.1 billion last year, down from a growth rate of 5.6% in 2016. The actuaries found the hospital spending growth rate fell "as growth in outpatient visits slowed, while growth in inpatient days increased at about the same rate in both 2016 and 2017."

    Total spending for physician and clinical services, which accounted for 20% of total health care spending in 2017, grew by 4.2% to $694.3 billion last year, down from a growth rate of 6.3% in 2015 and 5.4% in 2016.

    Further, the actuaries found retail prescription drug spending, which accounted for 10% of total health care spending in 2017, rose by 0.4% to $333.4 billion, continuing a steady decline seen in recent years. That figure does not include drugs administered by physicians or hospitals. The actuaries attributed the slowdown in retail drug spending to slower growth in the volume of certain high-cost drugs and in the number of prescriptions dispensed, declines in generic and brand-name drug prices, and a continued shift toward lower-cost generic drugs.

    Meanwhile, private health insurance spending in 2017 grew by 4.2% to $1.2 trillion, down from 5.7% in 2014, 6.9% in 2015, and 6.2% in 2016, according to the actuaries. The actuaries attributed the slowdown to a decrease in fees and taxes as a result of the Consolidated Appropriations Act of 2016, a decline in insured U.S. residents, and slower growth in medical benefits. According to the actuaries, private health insurers continued to be the largest payers for health care in 2017, accounting for 34% of total health care spending.

    Medicare spending in 2017 grew by 4.2% to $705.9 billion, down from 4.8% in 2015 and 4.3% in 2016. The actuaries found Medicare fee-for-service (FFS) spending in 2017 grew by 1.4%, down from 2.6% in 2016, while spending for Medicare private health plans grew by 10% in 2017, down from 8.1% in 2016. The actuaries found the faster growth in spending for Medicare private health plans offset the slower growth in Medicare FFS spending. The actuaries partly attributed the trends to a growing share of Medicare beneficiaries enrolling in Medicare Advantage plans.

    The growth rate for state and federal Medicaid spending slowed from 4.2% in 2016 to 2.9% in 2017, with total Medicaid spending reaching $581.9 billion in 2017, the actuaries said.

    In addition, the actuaries found the growth rate for consumers' out-of-pocket spending slowed from 4.4% in 2016 to 2.6% in 2017. However, the actuaries noted that a higher share of U.S. residents are enrolled in high-deductible health plans, which can shift health care costs to consumers.

    The actuaries also found the growth in household spending on health care slowed from 4.8% in 2016 to 3.8% in 2017. The actuaries attributed the slowdown primarily to the slower growth in out-of-pocket spending.


    Andy Slavitt, who served as acting CMS administrator under former President Barack Obama and now is a general partner at Town Hall Ventures, said, "This is unquestionably good news and adds to the evidence that we are in a new normal of lower cost growth." He continued, "The very slow per capita increases, particularly in Medicaid and Medicare, may provide evidence that the population health management that's taken hold since the [ACA] is working." Slavitt added, "To the extent that cost reductions are coming from lower utilization because people aren't getting needed care, that would be a bad thing. But I suspect a lot of what we're seeing in this report is better care management and more appropriate sites of care."

    Steve Wojcik, vice president of public policy for the National Business Group on Health, said the "3.9% [growth rate] is better than 4.8% and definitely better than the double-digit inflation of the 1990s. But …  there are still financial sustainability issues" (Pear, New York Times, 12/6; Armour, Wall Street Journal, 12/6; Hellmann, The Hill, 12/6; Meyer, Modern Healthcare, 12/6; Baker, "Vitals," Axios, 12/7; Martin et al., Health Affairs, 12/6; CMS release, 12/6; Williams, CQ Health, 12/6 [subscription required]).

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    In 2017, nonprofit hospital operating expenses outgrew revenue for the second year in a row. In fact, the gap between cost growth and revenue growth widened slightly from 1 percentage point in 2016 to 1.1 percentage points in 2017, driving median operating margins among not-for-profit hospitals to an all-time low of 1.6%.

    Join the series to learn more about what's driving this margin compression and see case examples from organization's who have established organization-wide models for driving efficiency improvements.

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