The $2.7 trillion question: Are health-care costs really slowing?

January 7, 2013

It is, unquestionably, the most important question in budget policy: How quickly will health spending grow?

For decades, health-care costs have grown faster than the rest of the economy. That has required the federal government to devote an ever-growing chunk of its budget to health insurance programs. That is the simple, central fact behind our long-term budget problem.

Or, as House Budget Chair Paul Ryan put it to Charlie Rose: "You cannot preempt a debt crisis, get this fiscal house in order without dealing with health care."

But something weird started happening in 2009, something that throws all of our budget debates into question: Health spending growth slowed.

During the economic downturn in 2009 and 2010, health-care costs grew at their slowest rate in decades. New data released Monday showed that slowdown continuing through 2011, with health-care spending growing by 3.9 percent for the third consecutive year. 

Health-care costs grew slower than the rest of the economy in 2011 for the first time in more than a decade. For health policy analysts, that's huge: When they try to get really aggressive on controlling costs, they usually aim for cost growth that is 1 percent higher than the rest of the economy.

That's the target for Medicare cost growth in the Affordable Care Act. If costs grow any faster, it triggers the Independent Payment Advisory Board, or IPAB, to make binding recommendations to Congress on the best way to hit that target. 

Right now, health-care costs are falling well below that target, no interference from the IPAB necessary. So the big question for budget makers and health policy experts is: Do they stay that way? Are the past three years the new normal or an aberration induced by the recession?

"The federal government says that GDP plus one is the goal, and were definitely in that ballpark," says Martin Gaynor, a health economist at Carnegie Mellon University. "It's hard to know what part of that is real change and what part is due to the recession."

Harvard University's David Cutler argues that three systemic changes, ones that will stretch beyond the recession, are most likely responsible for the slower growth rate. 

First, there are the health-care law's reduced reimbursement rates that will permanently slow hospital spending. Chief Medicare actuary Richard Foster estimates that these reimbursement changes will account for about 1 percent slower growth each year.

"When I go around the country, I'm seeing folks making huge changes to try and bring down costs," Cutler says. 

That shows up in the health spending data: Hospital cost growth decelerated from 4.9 percent in 2010 down to 4.3 percent in 2011.

The other two changes Cutler cites: Less development of big, breakthrough technologies (which can drive up spending ) and the growth of consumer-driven health-care plans, which tend to charge lower premiums but also offer less robust benefit coverage. 

"It's kind of the same drum beating for three years now: You just don't see cost increases of any significant value," he says. "There's a blip up here and there. But if you wanted to argue that we're in a new era of slower cost growth, I think you certainly could." 

That's the case for why we should think that this trend might be here to stay. Not all economists, however, agree: Some argue that the recession is still depressing health spending and that it's too soon to declare a solution to our health spending problems. 

"I've become more convinced than I previously was that the recession is still having an effect," says Charles Roehrig, director of the Center for Sustainable Health Spending at the Altarum Institute, a health policy think tank.  

Roehrig's group also tracks health-care spending. Their analysis, which stretches beyond Medicare's, suggests that health-care growth will remain relatively flat through 2012.

At the same time, he's skeptical that the low spending can say anything about long-term trends. He has recently begun working on research looking at how recessions interact with medical spending. He's found that economic downturns tend to depress health spending for about five years, which would put 2011 within the range of this last recession.

The recession also shifted millions of Americans out of the private insurance market and into state Medicaid programs. The number of Americans with employer-sponsored coverage dropped by 8 million between 2005 and 2011; over the same period, Medicare enrollment grew by more than 12 million.

As the economy recovers, most health analysts expect that some Medicaid enrollees will return to private coverage. And since private coverage tends to pay doctors more than Medicaid, that change would be expected to increase costs.

"Even with the same level of utilization, this population would have higher spending because private spending is different," says David Newman, executive director of the Health Care Cost Institute. "To the extent that access is less constrained in private insurance, we could see higher utilization too."

It will take a few years to know which side had the right prediction. As for the agency that actually gathers all this data, Medicare actuary Foster says that he thinks both narratives might pan out. Health-care costs will probably go up, he says, but perhaps not as quickly as they have in prior years.

"I think costs will accelerate from where we are," he says. "I don't think we'll go back to as dramatic of a level as we've seen in the past. There is a growing awareness that say a hospital can't just raise its charges because its costs went up. They have to worry about their cost reduction." 

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January 7, 2013

It is, unquestionably, the most important question in budget policy: How quickly will health spending grow?

For decades, health-care costs have grown faster than the rest of the economy. That has required the federal government to devote an ever-growing chunk of its budget to health insurance programs. That is the simple, central fact behind our long-term budget problem.

Or, as House Budget Chair Paul Ryan put it to Charlie Rose: "You cannot preempt a debt crisis, get this fiscal house in order without dealing with health care."

But something weird started happening in 2009, something that throws all of our budget debates into question: Health spending growth slowed.

During the economic downturn in 2009 and 2010, health-care costs grew at their slowest rate in decades. New data released Monday showed that slowdown continuing through 2011, with health-care spending growing by 3.9 percent for the third consecutive year. 

Health-care costs grew slower than the rest of the economy in 2011 for the first time in more than a decade. For health policy analysts, that's huge: When they try to get really aggressive on controlling costs, they usually aim for cost growth that is 1 percent higher than the rest of the economy.

That's the target for Medicare cost growth in the Affordable Care Act. If costs grow any faster, it triggers the Independent Payment Advisory Board, or IPAB, to make binding recommendations to Congress on the best way to hit that target. 

Right now, health-care costs are falling well below that target, no interference from the IPAB necessary. So the big question for budget makers and health policy experts is: Do they stay that way? Are the past three years the new normal or an aberration induced by the recession?

"The federal government says that GDP plus one is the goal, and were definitely in that ballpark," says Martin Gaynor, a health economist at Carnegie Mellon University. "It's hard to know what part of that is real change and what part is due to the recession."

Harvard University's David Cutler argues that three systemic changes, ones that will stretch beyond the recession, are most likely responsible for the slower growth rate. 

First, there are the health-care law's reduced reimbursement rates that will permanently slow hospital spending. Chief Medicare actuary Richard Foster estimates that these reimbursement changes will account for about 1 percent slower growth each year.

"When I go around the country, I'm seeing folks making huge changes to try and bring down costs," Cutler says. 

That shows up in the health spending data: Hospital cost growth decelerated from 4.9 percent in 2010 down to 4.3 percent in 2011.

The other two changes Cutler cites: Less development of big, breakthrough technologies (which can drive up spending ) and the growth of consumer-driven health-care plans, which tend to charge lower premiums but also offer less robust benefit coverage. 

"It's kind of the same drum beating for three years now: You just don't see cost increases of any significant value," he says. "There's a blip up here and there. But if you wanted to argue that we're in a new era of slower cost growth, I think you certainly could." 

That's the case for why we should think that this trend might be here to stay. Not all economists, however, agree: Some argue that the recession is still depressing health spending and that it's too soon to declare a solution to our health spending problems. 

"I've become more convinced than I previously was that the recession is still having an effect," says Charles Roehrig, director of the Center for Sustainable Health Spending at the Altarum Institute, a health policy think tank.  

Roehrig's group also tracks health-care spending. Their analysis, which stretches beyond Medicare's, suggests that health-care growth will remain relatively flat through 2012.

At the same time, he's skeptical that the low spending can say anything about long-term trends. He has recently begun working on research looking at how recessions interact with medical spending. He's found that economic downturns tend to depress health spending for about five years, which would put 2011 within the range of this last recession.

The recession also shifted millions of Americans out of the private insurance market and into state Medicaid programs. The number of Americans with employer-sponsored coverage dropped by 8 million between 2005 and 2011; over the same period, Medicare enrollment grew by more than 12 million.

As the economy recovers, most health analysts expect that some Medicaid enrollees will return to private coverage. And since private coverage tends to pay doctors more than Medicaid, that change would be expected to increase costs.

"Even with the same level of utilization, this population would have higher spending because private spending is different," says David Newman, executive director of the Health Care Cost Institute. "To the extent that access is less constrained in private insurance, we could see higher utilization too."

It will take a few years to know which side had the right prediction. As for the agency that actually gathers all this data, Medicare actuary Foster says that he thinks both narratives might pan out. Health-care costs will probably go up, he says, but perhaps not as quickly as they have in prior years.

"I think costs will accelerate from where we are," he says. "I don't think we'll go back to as dramatic of a level as we've seen in the past. There is a growing awareness that say a hospital can't just raise its charges because its costs went up. They have to worry about their cost reduction." 

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