Despite stronger economy, insurers keep up pressure on hospitals, doctors

Anthem Inc. CEO Joe Swedish last month wooed investors with this message: The Indianapolis-based insurance company is holding down health care spending AND pocketing more than half the savings.

Swedish, of course, didn’t put it quite so bluntly. But his message is similar to that coming from other health insurers, the Obama administration and consumers: Even as the economy recovers, they don’t plan to pay more for health care.

That’s bad news for health care providers and the makers of medical products—at least in the long-run. So far, the growing number of insured customers under Obamacare has lifted their overall revenue.

“The sector faces longer term pressures. Among these risks are investments in population health strategies [such as Anthem’s], which may suppress revenue and pressure margins,” wrote Daniel Steingart, an analyst at Moody’s Investors Service, in a 2016 outlook report for hospitals.

Swedish noted that Anthem is has more than $25 billion of its annual medical claims spending in so-called population health programs, which incentivize hospitals and doctors to reduce spending.

Those programs, which include 4.2 million patients, have seen 7.8 percent fewer hospital stays, 5.1 percent fewer outpatient surgeries, and 1.6 percent fewer ER visits.

Because of those decreases, Anthem is saving $9.51 per month for each patient participating in those programs and keeping $6.62 of that. That means health care providers are giving up $9.51 per patient per month in projected revenue and getting $2.89 back.

That’s not good math for the health care providers.

There have been similar results from the federal Medicare program’s accountable care contracts with health systems.

The effect of these programs is still small, but Medicare, Anthem and other health insurers intend to grow them. Medicare has promised to spend half its money via population health programs by 2018.

Anthem also expects growth—and growing results.

“The program is working, and we are making the necessary investments to advance our strategy, and we expect these results to improve over time,” Swedish told investors last month.

Making good on that promise is key for Anthem’s overall strategy, which is to gain market share by keeping its costs lower than competitors’, Swedish said.

Indeed, consumers, who because of high-deductible health plans are more price sensitive than ever, are also pressuring hospitals and doctors more than ever to keep their prices low, wrote Steingart, the Moody’s analyst. It’s also fueling non-traditional competitors in health care, such as the retail clinics in CVS and Walgreens drug stores.

Many health policy experts have chalked up the recent slowdown in health care spending to the lingering effects of the Great Recession of 2008 and 2009.

But even as insurance coverage surged in 2014, due to the influx of subsidies from Obamacare and a surge in employment, the underlying cost growth stayed historically low, according to an analysis of spending data published Sunday on the web site of the academic journal Health Affairs.

Michael Chernew, a professor of health care policy at Harvard Medical School, noted that excess spending growth in health care—a measure that removes the impact of inflation and population growth—actually remains far below historical norms. Excess spending growth is defined as growth in real per capita health spending minus growth in real per capita income.

From 1970 to 2006, excess growth in health expenditures averaged about 2.4 percent, Chernew wrote. But health care spending growth slowed significantly during and immediately following the Great Recession, averaging -0.5 percent from 2010 to 2012 and then just 0.1 percent in 2013.

In 2014, excess spending growth jumped up to 0.9 percent—at least some of which was driven by rising levels of insurance coverage.

“While higher than the immediate past, this recent growth is still comparatively low,” Chernew wrote. “Thus, the underlying pressure from medical innovation and price increases remains historically low.”

That’s good news for consumers and companies like Anthem, but bad news for hospitals and doctors.