Health care spending slowdown warrants sigh of relief

This post was written by OK Policy volunteer Zoraya Hightower. Zoraya completed her undergraduate degree at the University of Tulsa and this fall will begin a Master of Environmental Management at Yale.

America spends more than any other nation on health care. In 2011, health care spending accounted for 18 percent of U.S. Gross Domestic Product. Yet, we have millions who lack health insurance and our health outcomes are barely average compared to other OCED countries: in short, we pay too much for too little.

As much as America spends now, future health care spending is of even greater concern. Health care costs historically grow far more quickly than the rest of the economy. Increasing health care costs tend to corrode our employer- sponsored insurance system, increase the number of uninsured, drain workers’ wages, reduce funding for other allocations, and strain federal and state budgets. Of particular concern is the effect of health care programs such as Medicare and Medicaid on the ever-growing federal deficit.

Graph 1 (HC Blog) - crop

Source: Kaiser Family Foundation

Yet, amidst all of these well-known and frightening figures there seems to be a breath of fresh air. The growth of health care costs and overall health care spending have slowed significantly in the last four years, continuing a trend that began in the early 2000s.  Health care spending growth over the last four years has been at its lowest since the federal government began tracking these statistics in 1960. From 2008 – 2012, spending growth rates have averaged 4.2 percent, a 4.6 percentage point decrease from the peak reached in 2001 – 2003 (see figure). Instead of outpacing the rest of the economy, health care has grown at the same rate.

The greatest dip in health care growth rates coincides with the Great Recession that began in 2008. The recession’s effects included a decrease in health care service utilization spurred by job loss and benefit changes. This downward pressure on demand decreased both overall health care spending as well as general health care costs.

Although the recession is a likely explanation to the growth slowdown, it does not appear to explain the entire phenomenon. Health care spending growth began decreasing in the early 2000s and has remained low through 2013, beginning before and lasting well beyond the official recession.  Therefore, other more fundamental factors, such as innovation, efficiency and the Affordable Care Act (ACA), may also be playing a significant role.

It is of interest to us how much of the health care slowdown is attributable to the economy because it has implications for the longevity of the slowdown. As noted in a recent Kaiser Family Foundation brief:

To the extent this is a temporary phenomenon driven by the economic downturn and abnormally low inflation, we can expect health spending growth to bounce back up in the future as the economy recovers. To the extent structural changes are at play – i.e., that health spending is growing more slowly than what would be expected given the state of the economy – we may see a continuation of historically low rates of growth even as the economy returns to full employment.

Few seem to doubt that the economy is not the sole contributor of the decrease in growth. Studies have attributed anywhere from one-fifth to three-fourths of the slowdown to the economy. While it is unclear if the Great Recession accounts for a majority or minority of the growth slowdown, it seems that the unexplained portion tends to be associated with more permanent changes.

Graph 2 (HC Blog)The Economic Report of the President suggests that the structural changes to health care may be partially attributable to the ACA. For example, hospital readmissions of Medicare patients dropped last September, the month before the ACA would begin penalizing hospitals for such costly readmissions.  One study indicates that a reduction in the introduction rate of new technology may be responsible for the slowdown. Another suggests that a reduction in the introduction rate of pharmaceuticals, increased patient-cost sharing, and greater provider efficiency are the cause.

These studies support the idea of a more permanent decrease in health expenditure’s rate of growth and therefore a somewhat more optimistic outlook on the future. The Kaiser Family Foundation President and CEO Drew Altman warned we should expect health care spending to increase again as the economy expands. However, “the economy is not the entire story, and if we could shave even a percentage point or more off annual health care spending increases, we could save trillions over the next decade.” Over two trillion, in fact.

The Oklahoma FY 2013 budget dedicated over 1.2 billion dollars for health care, accounting for about one- fifth of state allocations. Therefore, a decline in the growth of health care spending could save state government tens, and eventually, hundreds of millions of dollars annually.

With a continual decrease in health costs, we could also see a continual reduction in the growth of insurance premiums as was the case in 2008 – 2010 and last year. Since 2011, the ACA requires at least 85 percent of insurance premiums to be spent on actual health care expenditures. This forced insurance companies to return more than $20 million to Oklahoma families in 2012.

Health care costs and the rate of growth will undoubtedly remain a concern. However, it appears that the future holds more moderate rates of growth induced by fundamental changes in the health care system. Therefore, federal and state budgets and Oklahomans’ wallets alike can breathe at least a small sigh of relief. 

ABOUT THE AUTHOR

The opinions stated in guest articles are not necessarily those of OK Policy, its staff, or its board. To see our guidelines for blog submissions, click here.

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