Why the Health Care Slowdown Is Unlikely to Last

Last month, we looked at reasons why some projections showing a slowdown health care costs most likely will not pan out.  Although the recent slowdown of health care cost growth is a very welcome sign, and one we hope will continue, there are factors that will put upward pressure on costs.  Specifically, these include temporary shifts due to changes in the economy, permanent one-time level cuts under the Affordable Care Act, structural growth-rate changes in health care, and an aging population. As we explained, efforts to draw a nominal trend line from currently lower cost growth are misleading by ignoring these factors. A new report by the Kaiser Family Foundation and the Altarum Institute takes a deeper dive into this issue and offers greater insight on what has been causing the slowdown in health spending and whether it will last. 

As you may recall, earlier this year the actuaries at CMS released health care cost growth estimates for 2011 – which was 3.9 percent and the third year in a row that health care cost growth has not increased above this level. While CMS will not have estimates for 2012 until next year, the Kaiser-Altarum study finds that the slowdown largely continued into 2012, with health spending growing by 4.3 percent – still far below the average 7.8 percent increase in previous decades. The authors also developed a model to determine how the growth in national health spending varies due to macroeconomic indicators. They found that based on patterns of real GDP changes and inflation, about 77 percent of the recent decline in health spending growth can be explained by changes in the broader economy. Additionally, according to their model, health spending not only responds to changes in the economy, but does so gradually and cumulatively:

For example, a 1% change in real GDP ultimately a produces a 1.49% change in health spending. The effect is greater than 1.0 because health spending over time grows faster than the economy as a whole, leading to a greater share of GDP devoted to health.

As a result, the Kaiser-Altarum study concludes what we warned of previously, that much of the decline in health spending has been due to the downturn in the economy and therefore is unlikely to last as the economy recovers.

Another contributing factor is excess cost growth, or how much faster health spending grows relative to the economy. For the most part, excess cost growth has been low over the last two decades since the emergence of managed care, but did spike in the early 2000s due to a backlash against managed care and hospital consolidation. While excess cost growth has since gone back down, the study shows that even if future excess growth is 1.6 percentage points annually – the average for the last 20 years – then health spending growth would still rise to over 7 percent around 2020.

The study is helpful to underscore that although there’s a lot of uncertainty over future health spending growth, certain pieces of the puzzle are clear. Even with no change to excess cost growth, the economy’s growth will gradually add 3.5 percentage points to the annual growth rate by 2019. As the study explains:

History suggests that previous efforts to control health care costs have had only a temporary effect, and there are initial signs that the recent slowdown (independent of the effects of the economy) is beginning to wane.

So, what does this mean for efforts to reduce federal health spending? As health care cost growth is likely to rise again over the next decade, lawmakers should continue to work towards enacting reforms that will apply downward pressure on cost growth and help to reduce federal health spending. The study finds that lowering the growth rate of national health spending by one percentage point on average over the next decade means that total health spending would be almost half a trillion dollars lower than expected 10 years from now -- resulting in sizable savings to the federal share of total health spending.

Still, more must be done beyond controlling for cost growth, as CBO and others have pointed to population aging as a major driver of health spending in the next few decades. There is no shortage of options available for lawmakers to choose from to reform health care spending, as we highlighted in our Health Care and Revenue Options report.  Last week, the Simpson-Bowles Bipartisan Path Forward offered one example of a comprehensive approach to tackling health spending, doing so with delivery system reforms and cost-sharing reforms backed up by a cap on the federal budgetary commitment to health care to help slow future cost growth, but also recommending structural reforms in federal health programs to address the aging population.

Only by addressing both the issues of aging and cost growth will lawmakers be able to put health care spending on a sustainable path in the long term. And currently low cost growth estimates should not lead to complacency with the status quo and be a distraction for the important work at hand.