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April 18, 2014

Consumer spending on health care jumps as Affordable Care Act takes hold

WASHINGTON — Nancy Beigel has known since September that she would need hernia surgery. She couldn't afford it on her $11,000 yearly income until she became eligible for Medicaid in January through President Barack Obama's signature health care law.

The law is prompting Beigel and others to spend more at the doctor's office and pharmacy, and the impact is reflected in the latest data on consumer spending. It climbed by $20.4 billion at an annualized rate adjusted for inflation in February, and $13 billion of the increase came from outlays on health services spurred by the Patient Protection and Affordable Care Act of 2010, according to figures from the Commerce Department.

The Urban Institute in Washington estimated this month that about 5.4 million people have gained insurance since January. That could be unleashing pent-up demand for medical procedures that are boosting out-of-pocket household spending on co- payments and prescriptions. Those who enrolled in more comprehensive insurance to meet Obamacare requirements may also be spending on newly-covered services.

"There will be a one-time bump in health spending," said Larry Levitt, a senior vice president at the Kaiser Family Foundation in Menlo Park, Calif., a nonprofit group focused on health care. "There's some new money coming into the system from the government, and we may also see people shifting money away from other goods into health care as they get better access to services."

While it's been rising fairly steadily since 2000, the share of consumer budgets dedicated to medical care climbed to a record 17.1 percent in February from 16.9 percent in December. Since the end of the recession in June 2009 through September, the proportion ranged from 16.4 percent to 16.7 percent.

Beigel, who Bloomberg found through Mary's Center, a Washington-based group that assisted people trying to sign up on the exchanges, had surgery Jan. 30, spent six days in the hospital and bought antibiotics to counter an infection, all funded by the government program.

"I'm hoping eventually to get well enough to look for other jobs," said Beigel, who lives in Beltsville, Md., and has a small janitorial business. She has poor circulation in one foot and a bad knee.

Spending isn't the only thing being affected by the Affordable Care Act, also known as Obamacare. About $11.4 billion of the $47.7 billion increase in February personal income at an annualized rate came from government transfer payments linked to the expanded Medicaid benefits under ACA, Commerce Department data show. In January, those transfers jumped by $19.3 billion, helping offset a $16.7 billion reduction caused by the expiration of emergency long-term unemployment benefits.

The Commerce Department's data are still preliminary. The figures are based on estimates until more comprehensive information becomes available in June with the release of the first-quarter survey on services. That makes the latest figures susceptible to revisions.

The share of uninsured adults 18 years old and older has declined 2.5 percentage points in the 21 states and Washington that have chosen to expand Medicaid and set up their own exchanges in the health insurance marketplace, a Gallup report Wednesday showed. There has been a 0.8 point drop in the 29 states taking neither or one of the actions.

"You would expect that toward the beginning of the year there would be a pickup in health spending," said Guy Berger, a U.S. economist at RBS Securities Inc. in Stamford, Conn. "Spending a little more on health-care services might mean, at least in the short run, spending a little less on other stuff."

In the longer run, ACA cost-control provisions, including curbs on Medicare, could keep a lid on expenses, according to Kaiser's Levitt, thus tempering spending. Health- care service costs rose 0.8 percent in February from a year earlier, compared with an average 2.6 percent pace in the prior 10 years.

Because much of the recent pickup in health spending is probably paid by insurance, it's unlikely to divert consumer dollars away from other items, said Dean Baker, co-director of the Center for Economic and Policy Research in Washington. Such outlays, even if funded by insurance and government programs, count as consumption in Commerce data.

"If the insurer is picking up the tab, I don't know that most people would even perceive" the need to reduce other expenses, Baker said.

Some consumers may face higher costs as they're required to buy insurance or pay a fine, or as workers are asked to contribute more toward their employer-provided health plans, leaving less cash on hand for other purchases. Economists and money managers say the effects could be felt from Walgreen pharmacies to Wal-Mart aisles.

Spending on health care began jumping in last year's fourth quarter as consumers rushed to beat projected increases in copays and premiums, said Chris Low, chief economist at FTN Financial in New York. Household outlays for medical services increased 4.1 percent from October through February, the biggest five-month gain since July 1992, according to Commerce Department data.

About 59 percent of employees say the ACA could increase insurance costs, according to a PwC U.S. survey of 2,100 employed adults released April 8. About one-third of 700 companies have increased deductibles or other cost-sharing, and 48 percent are considering similar moves, according to a survey by New York-based consulting firm Mercer.

"The effect on consumption is already so substantial, we ignore it at our own peril," Low wrote in a March 28 note to clients.

Sales could slow at stores such as Wal-Mart and Target, Low said, as middle-income households spend more on copays and deductibles. Low-earners will be less affected as they benefit from Medicaid expansion and tax credits, he said.

Purchases at drug and personal-care stores climbed 4.4 percent in the first three months of 2014 compared with the same period last year, the third-best after auto dealers and online merchants among 13 categories tracked, according to the Commerce Department's retail sales data issued this week. General- merchandise stores such as Wal-Mart have seen a 0.4 percent increase, while clothing outlets showed a 1.1 percent gain.

Retailers could see effects mounting through 2016 as more people enroll in insurance and more companies ask employees to shoulder higher costs, said Lance Roberts, a partner at STA Wealth Management in Houston.

"When you have an increase in costs, combined with a lack of wage increases, the consumer has to make decisions about where they spend their money," Roberts said. "Less money to spend means less money for retail."

In the initial enrollment period, about 7.5 million applicants sought insurance on Obamacare exchanges, which allow consumers to compare and choose plans, according to the Obama administration.

"While some of the new benefits will simply finance spending that consumers were previously financing out-of-pocket, it seems likely that a much larger share of benefit spending will show up as increased health consumption," Goldman Sachs economist Alec Phillips wrote in an April 1 note to clients.

Walgreen, a Deerfield, Ill.-based pharmacy and retail chain, is counting on the boost.

 "As enrollment grows, it's going to be positive for the business," Gregory D. Wasson, chief executive officer, said in a March 25 earnings call. "There are some positive signs over the last month or so that more and more people are getting coverage."

Kaiser's Levitt said rapid growth in health-service spending will probably last through May. Similar bumps could occur next year and in 2016, following the next enrollment periods, though those will be short-lived amid shorter signup windows.

There will be "at least a three-year transition period where we're ramping up enrollment and health spending," he said. Still, retailers may not notice a shift in spending toward health as the improving economy lifts broader demand, he said. "The changes are real, but they may not be big."



 

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