Last Wednesday, the Center for Medicare and Medicaid Services (CMS) released its National Health Expenditures (NHE) Report for 2023. Media headlines focused on these results:
- NHE grew 7.5% to $4.9 trillion in 2023 to $14,570 per person and 17.6% of Gross Domestic Product (GDP). The GDP grew 6.1% in the same period.
- From 2022 to 2023, Medicare spending grew 8.1% to $1,029.8 billion or 21% of total NHE. Medicaid spending grew 7.9% to $871.7 billion or 18% of total NHE. Private health insurance spending grew 11.5% to $1,464.6 billion or 30% of total NHE. Out of pocket spending grew 7.2% to $505.7 billion or 10% of total NHE.
- From 2022 to 2023, hospital expenditures grew 10.4% to $1,519.7 billion vs. 3.2% growth in 2022. Physician and clinical services expenditures grew 7.4% to $978.0 billion vs. than the 4.6% growth in 2022. Prescription drug spending increased 11.4% to $449.7 billion vs. 7.8% growth in 2022.
- The largest shares of total health spending were sponsored by the federal government (32 %) and households (27%). The private business share of health spending accounted for 18 % of total health care spending, state and local governments accounted for 16%, and other private revenues accounted for 7%.
- From 2023 to 2032, CMS projects average annual NHE growth will be 5.6%–above average GDP growth (4.3%) —resulting health spending becoming 19.7% of US GDP in 2032.
Most reporting seized on the overall increase (7.5%) and double digit increases for hospitals (10.4%) and prescription drugs (11.4%) which were explained by journalists as follows:
- ‘At 17.6% of GDP, health spending settled in a manageable range below 18% which it’s done since 2009. However, the longer-term projection to 19.7% is potentially problematic.’
- ‘2023 drug spending reflects the sweeping impact of GLP-1 drugs used to treat obesity—a relatively new class of expensive drugs dominated by two manufacturers (Novo Nordisk, Eli Lilly) hoping to seize on the $47 billion global market opportunity.’
- ‘Hospitals have recovered from the pandemic and enjoy positive operating margins. They’re financially healthy again.’
Essentially, the 2023 NHE data suggests that normalcy has returned to U.S. health industry finances. But a 5-year lookback (2019 pre-pandemic to 2023) paints a clearer picture:
- Overall spending increases for the 5 years are similar across all major categories: prescription drugs +33.3%, health insurance +28.8%, physicians +27.4% and hospitals +27.3%.
- Overall spending increases are significantly higher than population and overall economic growth. In becoming 19.7% of the overall GDP as forecast, it will be the most important industry to the whole economy and dictate how it performs for its citizens and businesses.
- Despite growing income disparities and costs associated with social determinants of health, funding for public health is low (3.3% of NHE).
| Indicators | % of 2023
NHE |
2023 (bil) | % Chg
2022-2023 |
% Chg
2019-2023 |
| Total National Health Spending | 100% | 4,866.5 | +7.5% | +29.4% |
| Medicare + Medicaid Spending | 39.1% | 1,901.5 | +8.0% | +33.9% |
| Total OOP | 10.4% | 505.7 | +7.2% | +25.5% |
| Hospital Spending | 31,2% | 1,519.7 | +10.4% | +27.3% |
| Physician Spending | 20.1% | 978 | +7.4% | +27.4% |
| Prescription Drugs Spending | 9.2% | 449.7 | +11.4% | +33.3% |
| Net Spending for Health Insurance | 6.2% | 302.9 | +7.2% | +28.8% |
| Spending for Public Health | 3.3% | 160.2 | -22.5% | +48.0% |
| US Population (US Census) | 340.0 Mil | +0.5% | +3.6% | |
| US GDP | $27.36 Tril | +6.3% | +27.14% |
So what?
Advocacy efforts by trade groups to protect the finances of their members have worked. The U.S. health industry is an attractive market for private investors because spending is predictable and strong.
But some question the relative value of health spending ascent to dominance of the entire economy: is the greater good served well or compromised as healthcare’s wins become losses to others. Critics of the status quo use compelling evidence to show price increases, not performance improvements, account for the lion’s share of spending growth. And many of these are taking leadership roles in the incoming Trump administration and 119th Congress.
So, looking forward, every Board and C suite team in healthcare must revisit 3 major issues that impact their financial stability:
- Deficit reduction and lower federal spending: The National Debt sits at $36 trillion. From 1980-2023, federal spending increased 280% while the population grew 150%. Federal spending for Medicare, Medicaid, VA, IHS and other programs accounts for 28% of total federal spending. The 119th Congress and Department of Government Efficiency have pledged cuts. Everything appears to be on the table especially those with near-term impact on lower federal spending and savings. Streamlining HHS, FDA and CMS are certain. Recalibrating or suspending CMMI alternative payment programs to produce increased savings for Medicare is certain. Passing legislation promoting food as medicine, site neutral payments, limits on NFP hospital tax exemptions, elimination of PBMs and constraint on insurer prior authorizations will advance. And some government programs will be suspended.
- Affordability: Employers and consumers are dissatisfied with the system. They believe affordability is not taken seriously by the industry, especially employers who pay 1.6 to 2.5 times Medicare rates for the services they purchase. As MedPAC chair Michael Chernow observed: “Commercial prices, driven by consolidation, are likely rising while public prices, driven in part by fiscal concerns, are likely relatively flat or declining in real terms (the exact data are hard to come by). The value we are getting for care at the margin is difficult to assess and likely reflects a mix of high-value care (increased screeningfor colorectal cancer) and lesser-value care (unnecessary imaging for low back pain).” The NHE 2023 spending forecast presumes efforts by antagonists to expose industry price gauging, executive compensation and lobbying activity will have benign impact on its affordability for consumers and employers. At a minimum, regulators, elected officials and special interests outside healthcare will be paying attention to affordability.
- Trust: Trust and confidence in the U.S. health system’s institutions i.e. physicians, hospitals, insurers, is at an all-time low. (per Gallup, Pew, KFF). The majority believe most of the players in healthcare put profit above everything else in how they operate. The majority think the health system is corrupted by financial motivations that result in inadequate or inaccessible care for those with lesser means. Designation as ‘not-for-profit’ and religious sponsorship conveys less. Messaging to enhance trust is more about actions than words: how executives are paid, how coverage decisions are made, how products and services are priced and how Boards of Directors balance short-term and long-term interests in strategic plans are key areas where trust can be demonstrated.
Final thought:
Early last Saturday, Congress passed and President Biden signed into law a stop-gap government funding package to keep federal programs afloat March 14, 2025. January 3, a new Congress convenes. January 20, the 47th President takes the oath of office. Concurrent with the changes in DC, conflicts in Gaza, Lebanon, Syria, Ukraine, South Korea and Russia continue. At home and abroad, conditions are uncertain. The same is true for U.S. healthcare.
Ours is a complicated industry operating in a complicated world. It is the industry looked to for the health and wellbeing for the entire population. To play that role responsibly and effectively, funding is necessary. However, the stewardship of those funds by incumbents and special interests is being questioned in many circles.
The NHE 2023 report provides a snapshot of where it’s currently spent and by whom. It does not, however, provide a road map toward where and how it should be spent and by whom. That direction requires statesmanship that puts long-term greater good ahead of short-term financial gain, It requires sectors to collaborate and regulators to push. And it requires a vision for a system that’s significantly better than what we have.
It’s a pivotal time for healthcare to demonstrate faithful accountability for its spending beyond the fortunes of its owners and executives.
Paul
PS Thanks for reading and reacting. I value feedback and appreciate suggestions. For 25 years, I have spent weekends attempting to assess what’s happening in this industry, digesting it in the weekly Keckley Report. In the process, I’ve met great people and encountered new solutions to old problems. Lord willing, I’ll continue with the next Keckley Report January 3, 2025 (unless an event or compelling study prompts something earlier). Happy holidays everyone.
Resources
Beyond National Health Expenditure Data: Three Things I Wish Were Better Measured Michael Chernow December 19, 2024 https://www.healthaffairs.org/content/forefront/beyond-national-health-expenditure-data-three-things-wish-were-better-measured
Spending on hospital care surged in 2023: CMS
Sections in Today’s Report
- Quotables
- Hospitals
- Insurers
- Investors
- Physicians
- Population Health
- Prescription Drugs
Quotables
Robert Pearl on Life Expectancy decline: “For many of us, December is a time to reflect—an opportunity to look back on a year of opportunities seized or missed, relationships nurtured or strained; soaring triumphs and aching regrets. Were the American healthcare system to do the same, it would have to confront a sobering reality: 2024 was a tough year—another in a long string of difficult years.
Consider data from the Institute for Health Metrics and Evaluation, recently published in The Lancet. The United States continues to spend more per capita on healthcare than any other nation, yet its outcomes tell a troubling story. Over the next 25 years, life expectancy in the U.S. is projected to rise by just two years—far less than in peer countries. This modest gain will see the U.S. fall from 49th to 66th globally in life expectancy rankings. Even more concerning, the average number of years Americans can expect to live in good health will increase by only 1.6 years, dropping the U.S. from 80th to 108th in global rankings. Alarmingly, in 20 states, women are projected to live fewer healthy years in 2050 than they do today—a nearly unthinkable decline.”
Monthly Musings on American Healthcare Robert Pearl December 2024app.flashissue.com/newsletters/a06fb9aff762a8fdc65a41430187c388c5812ebc
The Economist on 2024 Global outlook: “… take a wider view, and 2024 holds a more hopeful message. It affirmed the resilience of capitalist democracies, including America’s. At the same time, it laid bare some of the weaknesses of autocracies, including China. There is no easy road back to the old order. But world wars happen when rising powers challenge those in decline. American strength not only sets an example; it also makes conflict less likely.
One measure of democratic resilience was how the year’s elections led to peaceful political change. In 2024, 76 countries containing over half the world’s population went to the ballot box, more than ever before. Not all elections are real—Russia’s and Venezuela’s were farcical. But as Britain showed, when it turfed out the Conservatives after 14 years and five prime ministers, many were a rebuke to incumbents…
The enduring nature of America’s power was visible in the economy, too. Since 2020 it has grown at three times the pace of the rest of the g7. In 2024 the S&P 500 index rose by over 20%. In recent decades China’s economy has been catching up, but nominal gdp has fallen from about three-quarters the size of America’s at its peak in 2021 to two-thirds today…
In 2025 and beyond, technological and political change will continue to create remarkable opportunities for human progress. In 2024 democracies showed that they are built to take advantage of those opportunities—by sacking bad leaders, jettisoning obsolete ideas and choosing new priorities. That process is often messy, but it is a source of enduring strength. “
What to make of 2024: A turbulent year has shed fresh light on some important truths The Economist December 19, 2024 www. https://www.economist.com/leaders/2024/12/19/what-to-make-of-2024
Axios on Hospital Reforms in 2025: “Hospitals dodged substantial efforts to reform their industry through a year-end spending package, but advocates say the door has at least been cracked open to follow-on attempts addressing issues such as the way they bill for outpatient care.
Why it matters: After years of focusing on drug costs, this Congress started to train more attention on hospitals, which constitute the biggest share of U.S. health spending.
“Hospitals went unscathed for the most part this go-around,” said a hospital industry source. “But the bigger threats linger.”
Driving the news: U.S spending on hospital care grew at its fastest clip in more than three decades last year, and some in Congress want to slow the trend.”
Axios Vitals 1 big thing: Door opened to hospital reforms December 21, 2024
Pitchbook on 2025 Investment outlook for healthcare: “In 2025, the healthcare & life sciences VC industry will be defined by fewer but larger deals and funds. Investors will increasingly focus on late-stage, capital intensive opportunities with strong clinical validation and clearer paths to commercialization, consolidating resources into high-potential ventures. The shift toward concentration in healthcare & life sciences VC is the result of several intersecting historical trends, macroeconomic pressures, and industry dynamics, with the life sciences VC segment leading the way… Despite these challenges, healthcare & life sciences remain a resilient and attractive sector for VC and PE investors, driven by demographic shifts, technological advancements, and the growing need for innovative therapies. Investments in areas such as AI-driven drug discovery, precision medicine, and digital health are likely to dominate, further concentrating activity in the sector.”
2025_Healthcare_Life_Sciences_Outlook.pdf
Experian on patient experiences: “As competition intensifies with new providers and disruptive technologies entering the market, patient satisfaction will no longer be optional — it will define success in 2025. Investing in digital patient access tools gives patients the autonomy, choice and convenience they crave as modern digital consumers. Simplifying and streamlining access will not only help meet and exceed patient expectations, but will help providers future-proof their operations and build a sustainable revenue cycle for the years ahead.”
3 ways to improve the patient experience in 2025 https://www.experian.com/blogs/healthcare/3-ways-to-improve-the-patient-experience-in-2025/?SP_MID=5876-h&SP_RID=2616711-h
Michael Moore on Health Insurers: “Here’s a sad statistic for you: In the United States, we have a whopping 1.4 million people employed with the job of DENYING HEALTH CARE, vs only 1 million doctors in the entire country! That’s all you need to know about America. We pay more people to deny care than to give it. 1 million doctors to give care, 1.4 million brutes in cubicles doing their best to stop doctors from giving that care…
After the killing of the CEO of United HealthCare, the largest of these billion-dollar insurance companies, there was an immediate OUTPOURING of anger toward the health insurance industry. Some people have stepped forward to condemn this anger…
Yes, I condemn murder, and that’s why I condemn America’s broken, vile, rapacious, bloodthirsty, unethical, immoral health care industry and I condemn every one of the CEOs who are in charge of it and I condemn every politician who takes their money and keeps this system going instead of tearing it up, ripping it apart, and throwing it all away. We need to replace this system with something sane, something caring and loving — something that keeps people alive.”
A Manifesto Against For-Profit Health Insurance Companies — by Michael Moore
Hospitals
Beckers on 3Q hospital system finances: Beckers reported on 3Q finances for 41 hospital systems. Results:
- 26 of the 41 had positive operating margins
- Range: Hi: Tenet (21.3%) to Lo: Tufts (-10.2%)
- Profit margin comparisons by Ownership: Investor-owned (5): Avg. +7.42/range -6.6% to +21.3, Private NFP (36): Avg. 7.74%/range -10.2% to +9.6%
PK note: The List of hospitals is not projectible to all systems.
From -10.2% to 21.3%: 41 health systems ranked by operating margins Beckers December 19, 2024
Site neutral payment limit legislation in NY: “Spending on outpatient care—the care patients receive in a hospital outpatient department (HOPD), ambulatory surgical center (ASC), or a free-standing physician office—is one of the fastest growing components of health care costs. A new proposal in New York State seeks to rein in this spending for commercial payers, employers, and the millions of consumers they insure…
As introduced by State Senator Liz Krueger, S 9952 would require health care providers, including hospitals, physician offices, and urgent care clinics, to bill no more than 150% of what Medicare would pay for a defined set of outpatient services that are safe and appropriate to provide in lower-cost settings, such as a physician’s office or ASC…
According to an analysis by RAND, prices for outpatient services in New York State averaged 304% relative to Medicare in 2022. A payment cap of 150% of Medicare rates is therefore likely to reduce commercial spending on the outpatient services targeted by this proposal, although actual savings will depend on both current negotiated rates for this set of services, and whether negotiated rates for other services, not included in this reform, ultimately increase in response. These savings would accrue to insurance plans, employers, and other plan sponsors. For example, 32BJ Health Fund, a union-sponsored benefit plan, estimates that it would have saved $31 million, or 2% of its total health benefit expenditures, in 2022 if this rate cap had been in place…”
Georgetown University Center on Health Insurance Reforms (CHIR) https://chirblog.org/new-york-legislature-seeks-to-control-outpatient-spending-through-site-neutral-payment-and-rate-cap-proposal/
Insurers
CMS suspends VBID program: Last Monday, citing overspending, the Centers for Medicare and Medicaid Services announced it is suspending the Value-Based Insurance Design model (VBID) at the end of 2025. The latest data show “substantial and unmitigable costs” totaling $4.5 billion in 2021 and 2022, an amount “unprecedented in CMS innovation center models,”
62 insurers covering more than 7 million beneficiaries are participating in VBID in 2025, including UnitedHealth Group subsidiary UnitedHealthcare, Humana, CVS Health subsidiary Aetna, Elevance Health and the University of Pittsburgh Medical Center Health Plan, according to CMS.
Physicians
Study: Private equity acquisition of pain management clinics: “…private equity acquisitions of pain management practices from 2013 to 2023 were identified using Irving Levin health care market databases and further supplemented with manual searches of press releases and clinic websites in attempts to identify all relevant acquisitions
There were 69 pain management practices acquired by private equity, which represented 4.3% of the 1588 pain management practices in 2023. Private equity acquisitions of pain management practices spanned 26 different states, with the most being in Texas (10 [14.5%]), Florida (8 [11.6%]), and New Jersey (6 [8.7%]). As of 2023, 198 of 2241 pain management physicians (8.2%) worked for a private equity–owned pain management practice in the US compared with 0.4% in 2013. The states with the highest percentage of pain management physicians working for private equity–owned pain management practices in 2023 were Virginia (21 of 48 [44%]), Maryland (15 of 59 [25%]), Mississippi (5 of 23 [22%]), and Minnesota (3 of 12 [20%].”)
Jarrard Physician Survey: Physician trust: Per Jarrard’s survey of 416 physicians conducted XX,
- 54% are doubtful their leaderswere honest and transparent 52% in 2023.
- 47% of clinicians said they had a great deal or fair amount of trust that their leaders were making decisions that were good for patients, compared with 53% in 2023
- Physicians linked to nonprofit systems or independent practices had less trust in their employers than those tied to investor-owned companies. (38% vs. 51%)
- 77% of physicians said they were very or somewhat satisfied with their jobs vs. 88%. In 2023.
PK Note: The sample included 21% who were noted as “administrators” so unclear whether they are physicians or non-physicians, and whether included in overall results.
Physicians’ trust in leadership erodes: survey Modern Healthcare December 20, 2024 https://www.modernhealthcare.com/providers/physician-trust-hospital-leadership-jarrard-survey
Population Health
US Census Bureau: 2024 Update: “Following historically low growth at the height of the COVID-19 pandemic, the U.S. population grew substantially by almost 1% since 2023, outpacing average annual growth since 2000 and signaling a significant turnaround from the meager population gains at the start of this decade.
By 2024, after three consecutive years of population growth exceeding 0.5%, the United States seems to have recovered from pandemic-era lows.
The U.S. Census Bureau today released July 1, 2024, population estimates for the nation and states. The U.S. population reached 340.1 million, up 0.98% from 336.8 million on July 1, 2023 — the highest year-over-year increase since a jump of 0.99% between 2000 and 2001.
Since 2000, the nation has grown by almost 58 million, with an average annual growth rate of approximately 0.8%. The most robust growth occurred between 2001 and 2008, fueled by changing migration trends and higher birth rates.
U.S. Census Bureau www.census.gov
Study: longevity and physical activity: Researchers examined how much low physical activity (PA) reduces life expectancy, and how much life expectancy could be improved by increasing PA levels for both populations and individuals. Study participants were 40+ years with PA levels based on data from the 2003–2006 National Health and Nutritional Examination Survey. The main outcome was life expectancy based on PA levels. Results
“If all individuals were as active as the top 25% of the population, Americans over the age of 40 could live an extra 5.3 years (95% uncertainty interval 3.7 to 6.8 years) on average. The greatest gain in lifetime per hour of walking was seen for individuals in the lowest activity quartile where an additional hour’s walk could add 376.3 min (~6.3 hours) of life expectancy (95% uncertainty interval 321.5 to 428.5 min).”
Physical activity and life expectancy: a life-table analysis | British Journal of Sports Medicine
Economist on overdose death decline: “Having begun in earnest two decades ago with the overprescription of pain pills, it escalated through heroin and now to fentanyl, a synthetic opioid so potent that 0.2% of a gram can kill. Over a million Americans have died from overdoses since the turn of the century; 108,000 of those deaths were in 2022 alone.
And yet there is reason to think that the tide may be turning. Data published by the Centers for Disease Control and Prevention, a government agency, suggest that nationally, deaths peaked around August last year. In the 12 months to July this year, there were 90,000 deaths—still an appalling total, but a reduction of around a sixth. Could America be nearing the point where it is, as Mr. Weaver might put it, “done” with opioids?
No one is exactly sure why deaths might have started falling….”
Is the opioid epidemic finally burning out? The Economist
Treasury Report on Young Adult Economic Fragility: “Over the last few decades, there has been a pervasive sense of a decline in intergenerational mobility. A report in Science found that 90 percent of children born in the 1940s earned more than their parents did at age 30, while only half of children born in the mid-1980s have done the same.[1] As a result, young adults that judge their well-being by comparing their earnings to their parents may be dissatisfied. This note expands the intergenerational comparison beyond the documented decline in real earnings and looks at how a broad swath of measures of well-being of young adults today have evolved since their parents’ generation.
Some of the changes experienced over the last 30 years are positive, such as a rise in the real median earnings of young women and a recent surge in the net wealth of young households. Other changes have been neutral—neither good nor bad—as changes in culture and technology naturally lead to an evolution of choices and behavior…
Homeownership—a goal for many young middle-class Americans—has become much more costly since 1990…
The health of young Americans has declined in many ways since their parents’ generation. The prevalence of obesity—which increases the risk of heart disease, cancer, and other diseases—more than doubled amongst young Americans between 1990 and 2018, from 18% to 40%.
However, younger people are less concerned than older Americans about fiscal sustainability.
This shift has had profound effects on young adults today, who are competing for housing and jobs with older, wealthier, and more experienced counterparts. The aging of the population puts particular pressure on housing demand, as older Americans tend to demand more housing than younger adults… this demographic shift is contributing to serious challenges to fiscal sustainability as the number of social security recipients per every 100 payroll-paying workers is expected to increase from 30 in 1990 to 37 in 2024 and 44 in 2040.”
How does the Well-Being of Young Adults Compare to Their Parents’? US Department of Treasury December 18, 2024 https://home.treasury.gov/news/featured-stories/how-does-the-well-being-of-young-adults-compare-to-their-parents
Prescription drugs
McKinsey on Settlement in Opioid Over-Prescribing vis a vis Advisory Role with Purdue Pharma: “We should have appreciated the harm opioids were causing in our society and we should not have undertaken sales and marketing work for Purdue Pharma. This terrible public health crisis and our past work for opioid manufacturers will always be a source of profound regret for our firm…”
McKinsey Apologizes for Its Opioid Consulting in $650 Million Federal Settlement – WSJ
How ‘miracle’ weight-loss drugs will change the world
Obesity drug company growth strategies: “Eli Lilly and Novo Nordisk will kick off a massive shopping spree in 2025. The two obesity giants will be sitting on cash piles of around $80 billion by 2028, according to LSEG data, thanks to the runaway success of their weight-loss drugs. The challenge will be to put that money to work and avoid overpaying.
Novo Nordisk was the first mover in the obesity sector. The Danish pharma company’s drug Ozempic, which mimics a hormone called GLP-1, has been on the market since late 2017. Its obesity sales ballooned fivefold to $5.5 billion in the two years to 2023, thanks to its successor to Ozempic, called Wegovy. U.S.-listed Eli Lilly came later to the party, only getting approval for its GLP-1 medication Mounjaro in 2022.
With little competition today, the two pharma titans look set to keep growing quickly. Over the next five years, Eli Lilly’s revenue is expected to increase by an annual average clip of 20%, while Novo Nordisk’s will rise by 16%, LSEG forecasts show.”
