Are Health Costs Really Slowing

COMMENTARY Health Care Reform

Are Health Costs Really Slowing

Jan 16, 2013 4 min read


A recent report from the actuaries at the Centers for Medicare & Medicaid Services (CMS) has the Washington community all atwitter because it may suggest that health costs are permanently slowing down. The CMS team found that health spending slowed in 2011 for the third year, growing no faster than the rest of the economy.

Health spending as a proportion of gross domestic product (GDP) has now remained stable from 2009 through 2011 at 17.9%, after increasing seemingly relentlessly for many years. If that pattern continues, it could have big implications politically and economically.

The jury is still out, however, on whether the cause of the slowdown is the long, deep recession. As the CMS report’s authors point out, the recession certainly had some effect on the numbers. For instance, rising unemployment meant a decline in employer-based coverage, leading to many families seeking more economical ways of getting care or putting off treatment. And with economic uncertainty continuing, even well-insured households remain cautious about health spending.

But the $64?000 question is whether there are also deeper structural changes taking place in health care that will carry over after the direct effects of the recession have disappeared.

There are some reasons to be optimistic about deeper changes taking hold. For instance, the wider use of generic drugs encouraged by insurers is unlikely to reverse in better economic times. Moreover, hospitals and the medical profession today have a very different attitude toward systematic cost control and toward teams and networks than used to be the case. About 20% of all physicians are now employed by hospitals. That’s up 32% since 2000, according to the American Hospital Association’s most recent statistics. And there’s a growing acceptance by physicians of the need to work together in teams with an eye on both cost and better medical outcomes.

Another key trend is the growth of consumer-directed health plans. By 2011, the CMS actuaries report, 17% of covered workers were in such plans, more than double the proportion in 2008. And enrollment has been increasing at an average 23% annual clip. The greater cost-sharing associated with these plans promises to play a strong role in curbing future total costs.

Breathing Space or Trend?

Before we celebrate and declare the health cost crisis is over, we have to ponder 2 big questions. The first of these is whether the structural changes taking place are the kind that will permanently slow the rate of increase in spending or the kind that cause a temporary plateau in spending followed by the resumption of the previous trend of relentless increases in health care spending.

That pattern can happen in an industry if the typical product or package of services alters but the underlying costs of the components don’t change. Imagine, for instance, if Americans were to “trade down” over a short period to smaller, less expensive cars. There would be a slowdown in total spending during the shift. But unless the underlying costs of steel, labor, and other elements declined, the rate of increase in total automobile costs would return to its previous pace once the transition to smaller cars was complete.

We’ve seen that pattern before in health care, particularly in the mid-1990s, with the shift to managed care. That helped produce one-time transition savings that flattened spending as a percentage of GDP. But underlying cost trends remained and total health spending resumed its upward trend at the end of the decade.

Will we simply see the same pattern again now? Proponents of the Affordable Care Act (ACA) believe that the legislation will keep up the pressure on costs, despite requirements on employers and families to increase coverage and new taxes kicking in this year that will add to underlying health costs. A more significant development, however, may well be the shift to consumer-directed plans, which alters the basic financial relationship between working Americans and the health system by making out-of-pocket costs a larger share of the total coverage price. That means many patients will have a continuing incentive to seek better value for money and thereby encourage economic innovation in the provision of care. It’s been a frustration of health economists for decades that “over-insurance” in the employer-provided sector has blunted consumer pressure on costs.

And What Will Congress Do?

The second big question is this: if lawmakers begin to believe projections that a slowdown in the growth of health costs could continue, what will they do? If past experience is any guide, they will treat it much like the “peace dividend” associated with the collapse of the Soviet Union (which some saw as an opportunity to divert funds from the military budget to use for other purposes). If lawmakers perceive projected savings from a slowdown in the growth of heath costs as money already freed up and available for other purposes, that perception is likely to cause them to assume they have a cushion that allows them to avoid making tough decisions in Medicare and other programs. They might even feel they can expand health spending, such as adding new subsidies to the ACA, much as President George W. Bush felt that rosy budget projections permitted the enactment of Medicare Part D.

So perhaps we should remember Aristotle’s dictum: “One swallow does not make a summer.” Three years of slow health spending growth is welcome, but it would be unwise to open the champagne just yet. This is definitely not the time to ease up on seeking reforms in Medicare and Medicaid to limit the unfunded obligations on our children and grandchildren. And it is no time to cease challenging the new entitlements and cost-reduction wishful thinking of the ACA.

-Stuart M. Butler, PhD, is Director of the Center for Policy Innovation at the Heritage Foundation in Washington, DC, where he focuses on developing new policy ideas. Previously he served as Vice President for Domestic and Economic Policy Studies. He is also an Adjunct Professor at Georgetown University’s Graduate School.

First appeared in the Journal of the American Medical Association.

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