The impact of the Affordable Care Act (ACA) on healthcare spending is hotly debated in trade magazines, scientific journals, congresses and general media. How do we know if Affordable Care is just another buzzword, or if it is a concept that will change U.S. healthcare delivery? And what impact is it having on the medical device and healthcare IT industries?
Start of Spending Growth Slowdown
Healthcare spending growth slowed starting in 2008 as rising unemployment left more Americans without health insurance. And economists point to a slow recovery as one reason for depressed healthcare price inflation and per capita spending. An article in The Atlantic also supports a correlation between a lack of GDP growth (a recession) and healthcare spending growth in the world’s economies after 2009. However, a number of possible structural changes might also play a role. The Atlantic suggests two structural reasons for the change:
- People pay more for healthcare services (“high deductible insurance plans”);
- but not for unnecessary procedures and medications (a shift from fee-for-service to “value-based” care).
What should we measure to determine the impact of these changes on healthcare spending—of which medical device spending accounts for approximately 6%? In his book Mindset! Reset Your Thinking And See the Future (HarperCollins, October 2006), author John Naisbitt encourages readers to measure the accuracy and relevance of information using the analogy of a baseball box score to uncover evidence to support purported trends.
A box score that allows interpretation of these structural changes is a simple equation that describes total healthcare spending:
Total Healthcare Spending = Price/Service * Utilization of Services
So, reduced spending growth can result from either decreased growth in reimbursement for healthcare services, or decreased growth in service use (or both). Changing payer mix, sequestration and the ACA’s contribution reduction to the Medicare Advantage Program result in decreased reimbursements for healthcare services. High deductible plans and value-based care suppress demand for inpatient services. As healthcare systems seek cost reductions, polls of healthcare executives consistently rank “cost reduction” as a No. 1 priority.
Healthcare Seeks Cost Cuts
Healthcare systems reduce operating costs by focusing on patient care supplies and defining new “buying centers” to negotiate cost-saving contracts with suppliers. To understand this impact, let’s consider two types of medical devices: Consumables and capital goods, such as knee implants and stereotactic radiosurgery systems. The January 2014 Modern Healthcare/ECRI Technology Price Index demonstrates price declines of up to 10% for eight of the top 10 medical device consumables, compared to January 2013. While prices for capital goods also continue to decline, medical equipment demand is dampened by increased replacement cycles—some of which doubled from six to seven years to 12 or more years.
Reductions in reimbursement and utilization of healthcare services are changing the way healthcare systems purchase and adopt medical devices. In future columns, I will dig even deeper into this impact on the device industry.