How the cost of treating different diseases is driving spending growth

The Bureau of Economic Analysis (BEA) recently announced a new Health Care Satellite Account (HCSA) that estimates spending and price growth by disease category (e.g. cancer, infectious disease). This approach differs from the official categorization of health spending by service type (e.g. provider services). Essentially, the new satellite account redefines the “commodity” in healthcare as the treatment for specific diseases, rather than a hospital stay or a physician visit.

BEA researchers found that the largest categories of medical services spending include the treatment of circulatory diseases ($234 billion in 2010) and ill-defined conditions ($207 billion). Ill-defined conditions include check-ups, preventive care, and treatment of minor conditions such as colds, flus, and allergies. (Nursing home and dental care are not included in the medical services spending by disease.)

After adjusting for treatment cost, spending on ill-defined conditions grew faster than any other disease category from 2000 – 2010. The second-fastest increase was in the treatment of endocrine disorders (which include diabetes and high cholesterol). Adjusting for treatment cost, these two disease categories grew by 5.2% and 4.8% respectively, compared to an average of 1.9% across all diseases and 2.0% across the health sector generally. (Because these spending changes take into account the cost of treatment, they primarily represent changes in the number of treated cases over the time period.)

Our analysis of the data (in the chart collection below) found that three disease categories — ill-defined, musculoskeletal, and circulatory conditions — contributed to more than one third (37.5%) of medical services spending growth by disease from 2000-2010. That is largely because those are the three largest categories of spending.

The findings described above come from the HCSA “Blended Account.” BEA provides two versions of the satellite account: the “MEPS Account,” which is based entirely on the Medical Expenditure Panel Survey, and the “Blended Account,” which supplements MEPS data with millions of records from Medicare and private insurance carriers, therefore yielding smoother results.

Using the Blended Account to analyze the effect of increasing prices on overall medical spending growth, BEA researchers found that 73% of growth was due to the rising cost of treatment, while 27% was due to the number of treated cases.

 “[S]everal health policy papers have debated whether spending growth is due to the rising cost of treatment or more individuals being treated. The answer has implications for how health policies are shaped to combat rising health care costs. Both [Satellite] accounts suggest that the rising costs are driven primarily by increases in the cost per case.”

–Abe Dunn and colleagues, Bureau of Economic Analysis

Among other changes from the official health account, price indexes in the HCSA represent the increased cost of treating a particular disease and are therefore affected by shifts from higher-cost to lower-cost services, by increases in the intensity of services, and by shifts in the restrictiveness of health insurance coverage.  For this reason, the indexes in the HCSA can grow at different rates from the price indexes published in the official health account. Generally, this means that measured prices are higher in the satellite account. The authors offer a few possible explanations including the residual effects of the managed care backlash (a time when many people left HMOs for less restrictive plans), increased use of outpatient diagnostic imaging, and greater intensity of services per office visit.

By breaking out price indexes by disease conditions, BEA researchers hope to make comparisons between spending growth and health outcomes for various conditions more feasible. In other words, we may be spending more to treat a given illness than we were ten years ago, but does that increased spending correspond to better outcomes?  BEA says that drawing connections between costs and quality, as well as adjusting for the severity of diseases, will be a focus of future work.