3 Reasons Why Health-Care Costs Are Likely to Rise

Opinions rage about whether health insurance costs will rise or fall with implementation of the Affordable Care Act, commonly known as Obamacare. What gets relatively little attention, though, is that overall health-care cost growth has actually slowed down over the last few years. According to the Centers for Medicare and Medicaid Services, national health-care spending grew 3.9% annually from 2009 to 2011 -- the lowest rate since the government began tracking the statistics over 50 years ago.

Don't get used to slower health-care cost growth, though. There are several reasons why higher spending could soon rear its head again. Here are three that could drive health-care costs up in the near future.

1. Macroeconomic factors
The Kaiser Family Foundation, and the Altarum Institute's Center for Sustainable Health Spending, created a statistical model that helps identify how U.S. health spending varies with several macroeconomic indicators. Their research found that two macroeconomic variables account for a whopping 85% of variation in health-care spending growth between 1965 and 2011.

Inflation was the biggest factor influencing health spending. Real gross domestic product, or GDP, growth was next -- with particular focus on growth in the current year and the prior five years.

These two variables were uncannily predictive of national health-care spending growth rates. And, unless the model breaks down in the years ahead, that means that any uptick in inflation and/or GDP will result in higher health-care spending.

So far, the Federal Reserve has done a good job keeping inflation rates down. Actually, some are more concerned about deflation rather than higher inflation. GDP growth, though, should eventually increase. Take a look at the rolling six-year average real GDP growth rate since 1960.

Source: U.S. Department of Commerce-Bureau of Economic Analysis

We're experiencing the lowest GDP growth rates in decades. Unless we assume that the economy never fully recovers from the Great Recession, GDP growth should pick up steam at some point. When it does, health-care costs will increase in tandem.

2. Obamacare
While we can't be sure how long it will take for GDP growth to get back to historical levels, there's one driver of higher health spending that you can probably mark on your calendar now: implementation of Obamacare in 2014. Actuaries and economists with the federal government expect health-care cost growth to jump to 7.4% next year as a result of health reform implementation.

The reason for this projected increase is simple: higher demand for health services. If more uninsured Americans obtain insurance, they're likely to use more health services. This increased demand will drive costs higher.

3. The patent cliff's cliff
Pharmacy benefits manager Express Scripts (NASDAQ: ESRX  ) says that spending on prescription drugs decreased in 2012 for the first time in two decades of monitoring. This slight drop stemmed from more low-cost generic drugs on the market. Several popular brand drugs lost patent protection in recent years in a wave often referred to as the "patent cliff".

However, Express Scripts' data points to what I have previously called the "patent cliff's cliff." A big drop-off is occurring this year for prescription drugs becoming available as generics. While there will be a rebound from 2014 to 2016, another big decline is projected beginning in 2017. As pharmaceutical companies come out with newer and more effective drugs, it seems likely that prescription drug spending -- the third-highest health-care cost in the U.S. -- will go up.

Who wins?
While no one wants to pay more for health care, smart investors will try to determine how to profit from the likelihood of rising costs. I see two potential ways to play this coming trend.

First, some companies will benefit from higher utilization associated with the implementation of Obamacare and possible higher GDP growth down the road. For example, Community Health Systems (NYSE: CYH  ) , which operates 135 hospitals, could experience gains if health reform allows it to reduce the levels of bad debt written off from uninsured patients. However, note that a recent study from Deloitte casts doubt on whether hospitals will actually lower their bad debt levels with Obamacare.

Pfizer (NYSE: PFE  ) could be one stock that allows investors to profit from higher prescription drug spending. The big pharmaceutical firm has felt the pain of the patent cliff, but counts several new products in its lineup with strong potential and a pretty robust pipeline.

The second way to profit from higher health costs is to go with companies that help minimize those costs. Express Scripts is a good pick in that regard. As the nation's largest pharmacy benefits manager, or PBM, it has the scale and analytical capabilities to help other companies keep prescription drug spending under control.

MedAssets (NASDAQ: MDAS  ) is another potential winner. The company provides solutions for health-care supply chain management, and revenue cycle management to hospitals. Helping customers save money in an environment of rising costs makes for a pretty good business model, in my view.

Some people might think that the slowing health spending rates are here to stay -- with most Americans emerging as winners. I suspect that a rebound in GDP growth, Obamacare, and fewer new generic drugs will prove that view too optimistic. Then again, I might be too optimistic about the prospects for the economy, and for Obamacare's success in spurring demand for health-care services. We'll see which optimistic view wins.

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Read/Post Comments (11) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 17, 2013, at 9:01 AM, Barmil wrote:

    I am not against capitalism and want keep it going for it is the heartbeat of America.

    With that said .. the scenario of big business and health care do not mix well and can have a lot of repercussions. It sets up too many conflicts of interest.

    I don't see it working well for either side.

  • Report this Comment On August 17, 2013, at 9:13 AM, Icthelite wrote:

    Print all the words and pretty charts you want. There are only two reasons why medical cost keep rising. #1. No regulation or over sight in the medical industry. #2. Greed.

    If almost every other country on the globe can give health care to its citizenry for much, much less so could the USA.

    And don’t feed me the line that we have higher cost because of research. Most of our research today is centered around a the sex drive of an eighteen year old on prom night, a stiffer Johnson, relief of aging pains and getting the body of a health guru that’s one third the age of their target audience.

  • Report this Comment On August 17, 2013, at 9:35 AM, DPRStock wrote:

    Physician pay has been " frozen" and even decreasing slightly for over 20 years. Why do you think we've been forced to sell our practices to large hospital networks? If america really looked at why healthcare costs have risen, the "affordable" health care act would never have been implemented. Medicare started all this years ago, distorted the market, and served as a legal standard for which private payors were able to exploit and deny legitimate claims for patients. Similar to the consolidation of the banking industry with subsequent collapse, fast forward 10 yrs. from today as these hospital systems are "too big to fail" and we will have a similar crisis with different repecussions to us all. My 2cents as a surgeon

  • Report this Comment On August 17, 2013, at 9:45 AM, Panth wrote:

    I disagree with Barmil, capitalism and health care would go well together, if the market was not so distorted out of whack by the government in the first place.

    Icthelite, you cannot compare health care in other countries with health care here, apples to oranges. Other countries may do a better job of providing health care for their poor, but overall quality of care is not the same.

  • Report this Comment On August 17, 2013, at 10:44 AM, slanciano wrote:

    Ever wonder what's really in store for you involving Obozocare ?

    Bring up this Youtube portal page and type in the following search criteria:

    Know the TRUTH about the Government Health Care Bill

    Click search - then click on one video icons on the left margin

    This is video reading of the law word for word. No propaganda just the facts.

    This ends today's lesson.

  • Report this Comment On August 17, 2013, at 10:55 AM, sabebrush6 wrote:

    Have to agree with Panth on the healthcare in other countries. It's not all that great and it takes for ever to get an appointment. Plus ----- they have much higher taxes to pay for it.

  • Report this Comment On August 17, 2013, at 12:22 PM, gulfcoastrebel wrote:

    Health care costs have risen every year in memory, sometimes by double digits. Why would they not rise again? Why is a headline proclaiming 'health care costs will rise' news at all? Isn't this just intended to be more red meat to feed the anti-"Obamacare" piranha? What other reason would Motley Fool have for publishing such unremarkable "news"?

  • Report this Comment On August 17, 2013, at 1:07 PM, roger142 wrote:

    I'm guessing the reason health care spending went down from 09 to 11 was because so many people lost their jobs and health insurance. As for the cost of health care, we really don't know what it cost.

    Try going into a hospital and getting a price quote for various procedures. Most hospitals, especially the non profit ones will tell you their maximum rates, if they tell you at all. Hospitals don't like to discuss prices, they prefer to just do the work and send out a bill that is often not based on actual cost.

    My local non profit bills uninsured people $35k for an appendectomy. If the uninsured person can pay in full within 30 days, the hospital gives them a 35% discount bringing the cost down to around $24k. Insurance companies have negotiated prices and pay $11k for the same procedure.

    The same non profit charges uninsured people $4,500 for a CT scan, but if they can pay in full within 30 days they pay around $2,800. Insurance companies pay $850.

    My local for profit hospital charges $4,900 for a CT scan, but if a person can pay up front they get a 88% discount bringing the cost down to $700.

    Please note, I just had to deal with these procedures and my numbers for my area are accurate!

  • Report this Comment On August 17, 2013, at 4:27 PM, amysname wrote:

    Three reasons why Healthcare if rising in costs:

    Obama

    Pelos

    Reid.

  • Report this Comment On August 17, 2013, at 5:01 PM, sagehopper wrote:

    Actually, Two reasons is a bit more accurate. The three covers up a few things. One..prices ALWAYS go up. Two: The Government involvement.. That automatically makes things escalate, because of the lack of oversight , and the lack of good sense.

  • Report this Comment On August 17, 2013, at 7:58 PM, doco177 wrote:

    Google.... "Obamacare Flowchart" at Intellectual Takeout .... to see a visual representation of the corrupt mess this really is

    1. Millions are losing the insurance Obama promised they could keep. Because ObamaCare forces employers to offer expensive Cadillac plans but also offers the option of paying a fine for not providing health insurance that can be cheaper than providing it, between seven and twenty million Americans are likely to lose their health insurance coverage according to the Congressional Budget Office. The original estimate was closer to four million.

    2. The cost of healthcare premiums is about to further skyrocket. Premium costs have already exploded, but that is a slow-motion explosion. In the near future, we could see costs double or worse. Naturally, these costs will hit an already burdened middle class hardest.

    3. Lost jobs. Lost jobs.

    The Federal Reserve's March beige book on economic activity noted that businesses "cited the unknown effects of the Affordable Care Act as reasons for planned layoffs and reluctance to hire more staff."

    Consulting firm Adecco found that half of the small businesses it surveyed in January either plan to cut their workforce, not hire new workers, or shift to part-time or temporary help because of ObamaCare.

    4. Doctor shortages that will mean rationing: The healthcare industry is already a bureaucratic quagmire. ObamaCare is about to add steroids. As the profession becomes tyrannized by government, the talented people currently practicing medicine plan to get out sooner than expected. Who knows how many will choose not to get in. Doctor shortages are what lead to the nightmare known as rationed care.

    5. Somewhere around $800 billion in tax increases will hit America's middle class. This added burden will not only further oppress a middle class already reeling from a drop in wages over the last few years, but could damage the overall economy.

    6. Inflation, the cruelest tax on the poor. When businesses get socked with added costs brought about by higher taxes and burdensome government mandates, they pass those cost along to the consumer in the form of higher prices.

    7. Added bureaucracy. Even those Obama lapdogs over at the Washington Post's Wonk Blog are admitting that applying for health care is about to get more burdensome than the byzantine paperwork involved in buying a home.

    8. To cut costs or to avoid having to provide insurance, workers on the economic margins are already losing hours, which means a lower paycheck. There are a million sad stories in ObamaVille; here are just a few of them.

    9. ObamaCare is projected to add $6.2 TRILLION to a deficit the GAO has already declared "unsustainable." That's "trillion" with a "t".

    10. More taxes than currently estimated are likely to hit because of situations like this one.

    11.Muslims, Amish, Native Americans, Congress are exempt from mandate and penalties under Obamacare that the rest of us have to pay.

    Three years ago, Obama, Democrats, and his media lied to us about cutting the cost of health care, being able to keep our insurance, and not taxing the middle class. Today, those lies and what ObamaCare is and will do to the working and middle class are the biggest untold story in America.

    The govt becoming more involved in health care is the reason the costs have increased. So Govt creates a crisis, then provides a solution that comes at the expense of liberty and freedom, costs trillions, and by most accounts won't solve the problem but in fact make it far worse.Corruption, incompetence, disregard of the Constitution, and lying are integral to the way that this country is being run.

    Boycott and Repeal Obamacare...If only a mere 20% of the over 300 million population of the USA boycott Obamacare the government would be overwhelmed to even think they could penalize or mandate every citizen that refused to participate in the most corrupt and unlawful ways which it was passed that circumvented the constitution of the United States.

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