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What's behind the flatlining of US health care spending since 2009

Posted by John McDonough  November 24, 2013 03:10 PM

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Many of you have seen or heard about the new Commonwealth Fund report: "Access, Affordability, and Insurance Complexity Are Often Worse in the United States Compared to 10 Other Countries." It's a familiar song we've been hearing for years, and, according to the Fund, it's not getting better:

"A 2013 survey conducted in 11 countries finds that U.S. adults are significantly more likely than their counterparts to forgo health care because of the cost, to have difficulty paying for care even when they have insurance, and to deal with time-consuming insurance issues."

Here is one chart I find compelling and want to consider in light of another study that came out this past week:

Slide john.jpg

Many noteworthy aspects here.  For example, if we look back at 1980, the U.S. was clearly one of the most expensive systems, perhaps the most.  And, it was also in the pack of the most expensive health systems that included Germany, Switzerland and others.  Only in the 1980s did we break from the pack and see our medical spending increases far outstrip those of our peer nations.  Boy, did it ever!

Also, look at the 1990s, 8 or so years of flatlined U.S. health care spending growth as a share of the overall economy.  Remember, this is a two part equation here -- the numerator is the rate of health spending growth, and the denominator is the rate of increase in the overall U.S. gross domestic product.  During the mid part of the 1990s, we saw declining rates of health spending tied to the surge in aggressive managed care; in the latter part of the 1990s, costs had started to rise, though disguised by a rapidly growing economy.

Then we can see in the first decade of the new century, a new explosion in the cost growth.

And then, take a look at 2009 and beyond and behold the new flatline.  On this chart, it only goes up to 2011, but if we extended to 2013, it would show more of the same and more, as this chart below shows:

real per enrollee spending growth 2013.jpg

And the question is: what's behind the three black dots on the upper right hand corner of the above chart, as well as the indicators  in the chart to the left? 

This past week, the White House Council of Economic Advisers gave their extensively studied opinion on the topic: "Trends in Health Care Cost Growth and the Role of the Affordable Care Act."

Bottom line? The spending slowdown is about more than the recession (which ended in 2009) -- it's also structural, a significant part of the slowdown can be tied to the impact of the Affordable Care Act.  Here are summaries of their conclusions -- worth a close read:

1. Health care spending growth is the lowest on record.  According to the most recent projections, real per capita health care spending has grown at an estimated average annual rate of just 1.3 percent over the three years since 2010. This is the lowest rate on record for any three-year period and less than one-third the long-term historical average stretching back to 1965.

 

2. Health care price inflation is at its lowest rate in 50 years.  Recent years have also seen exceptionally slow growth in the growth of prices in the health care sector, in addition to total spending. Measured using personal consumption expenditure price indices, health care inflation is currently running at just 1 percent on a year-over-year basis, the lowest level since January 1962. (Health care inflation measured using the medical CPI is at levels not seen since September 1972.

 

3. Recent slow growth in health care spending has substantially improved the long-term Federal budget outlook. The Congressional Budget Office (CBO) has reduced its projections of future Medicare and Medicaid spending in 2020 by $147billion (0.6 percent of GDP) since August 2010. This represents about a 10 percent reduction in projected spending on these programs. These revisions primarily reflect the recent slow growth in health care spending.

 

4. The slowdown in health care cost growth is more than just an artifact of the 2007-2009 recession: something has changed. The fact that the health cost slowdown has persisted so long even as the economy is recovering, the fact that it is reflected in health care prices – not just utilization or coverage, and the fact that it has also shown up in Medicare – which is more insulated from economic trends, all imply that the current slowdown is the result of more than just the recession and its aftermath. Rather, the 2 slowdown appears to reflect “structural” changes in the United States health care system, a conclusion consistent with a substantial body of recent research.

 

5. The ACA is contributing to the recent slow growth in health care prices and spending and is improving quality of care. ACA provisions that reduce Medicare overpayments to private insurers and medical providers are contributing to the recent slow growth in health care prices and spending. In addition, ACA reforms that aim to improve the quality of care are reducing hospital readmission rates and increasing provider participation in payment models designed to promote high-quality, integrated care.

 

6. New economic research shows that the ACA’s Medicare reforms are likely to reduce health care spending and improve quality system-wide. Recent research implies that reforms to Medicare will have “spillover effects” that reduce costs and improve quality system-wide. In economic terms, this suggests that efforts to reform Medicare’s payment system are “public goods.”

 

7. Accounting for “spillovers” implies that the ACA’s effect on health care price inflation may be much larger than previously understood.  The direct effect of ACA provisions that reduce Medicare overpayments to private insurers and medical providers has been to reduce health care price inflation by an estimated 0.2 percent per year since 2010. Accounting for the “spillover effects” discussed above raises this estimate to 0.5 percent per year, which represents a substantial fraction of the recent slowdown. Slow growth in health care costs, thanks in part to the ACA, is likely to have substantial benefits for the Nation’s economy in both the short-run and the long-run.

 

8. In the short run, slower growth in health spending is a positive for employment. The slow growth in health care costs has reduced employers’ benefit costs, increasing firms’ incentives to hire additional workers.  Available estimates suggest these gains could be substantial, although the magnitude is uncertain.

 

9. Over the long run, slower growth in health spending translates directly into higher wages and living standards. If half the recent slowdown in spending can be sustained, health care spending a decade from now will be about $1,400 per person lower than if growth returned to its 2000-2007 trend, a benefit that workers will realize in the form of higher wages and that federal and state governments will realize as lower costs.

 

10. CBO estimates that the ACA will substantially reduce long-term deficits. In large part because of the ACA’s role in slowing the growth of health care spending, CBO estimates that the ACA will reduce deficits by about $100 billion over the coming decade and by an average of 0.5 percent of GDP ($83 billion per year in today’s economy) over the following decade. These deficit savings are likely to grow over time and are separate from the revisions in CBO’s Medicare and Medicaid spending projections that were discussed on the last page (which are not directly attributable to the ACA.  

This blog is not written or edited by Boston.com or the Boston Globe.
The author is solely responsible for the content.

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About the author

John E. McDonough is a professor of practice at the Harvard School of Public Health. He is the author of the book “Inside National Health Reform”, published in 2011 by More »

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