Here’s why health-care costs are slowing

April 22, 2013

Welcome to Health Reform Watch, Sarah Kliff’s regular look at how the Affordable Care Act is changing the American health-care system — and being changed by it. You can reach Sarah with questions, comments and suggestions here. Check back every Monday, Wednesday and Friday afternoon for the latest edition, and read previous columns here.

Here's what we do know about health-care spending: It's growing slower now than any point in the past five decades.

What we don't know is why, whether that slowdown is the temporary result of an economic recession or reflects more permanent, structural changes to health-care industry.

The answer has huge implications for the federal budget, which now faces threats of really fast growth in Medicare, Medicaid and other health programs. If those programs grow like they have for the past few years — at the same rate as the rest of the economy — then that frees up lots of funds for whatever other investments the federal government wants to make.

A new study from the Kaiser Family Foundation suggests that most of the slowdown is indeed temporary – but even the smaller fraction that is permanent has the potential to cut a half-trillion health-care costs over the next decade.

"That's huge in a $3 trillion health-care system, if we could shave a percent off health spending growth per year," says Larry Levitt, vice president of special projects at the Kaiser Family Foundation.

Levitt and Kaiser Family Foundation President Drew Altman worked with the Altarum Institute, a nonprofit based in Michigan, to come up with a model that predicts health spending growth. They found that just two factors did a really great job of explaining how quickly health-care costs grew. The first was inflation and the second growth in the overall economy, not just that year but also in the five years prior.

"This model has been used in the backrooms of macroeconomics for years," Levitt says. "We tried to update it, and make it a bit more relevant. The real key is that it's not just GDP and inflation in that year. There's a really significant lagged effect of the economy on health care, where its one of the last things people count on."


This model, they found, tracks health-care cost growth pretty closely, which you can see in the graph below. The variables explain 85 percent of health cost growth variation over the past five decades.

This Kaiser-Altarum model, which relies only on economic indicators, would expect health-care costs to grow by 5.6 percent between 2008 and 20112, the time frame when costs really began to slow.

Turns out, health-care costs grew at a rate of 4.6 percent, one percentage point slower than the economic slowdown can explain.

There are two ways to read this finding. One is that this health-care slowdown is a bit of a bust: Most of it (77 percent) is the product of an economic downturn and, as the economy rebounds, that all will disappear.

There is, however, another, much more optimistic interpretation that focuses on the fact that 23 percent of the slowdown wasn't due to the economy at all — that we actually did something differently in the health-care system. That's the percentage point of slow growth that the economy did not predict.

And if that trend holds, Levitt and Altman project that we'll spend $2 trillion less on health care over the next decade. "That's huge in a $3 trillion system," Levitt says.

The big question seems to be whether that trend does indeed stay steady. Health economists remember the other period of slow health-care cost growth, back in the 1990s, when Washington debated health reform and managed care companies clamped down on care.


Health reform efforts failed and insurers saw a patient backlash against managed care, which tended to limit access to specialists. In the early 2000s, as you can see above, health-care costs once again grew much faster than the rest of of the economy.

So is this time any different? Levitt thinks it could be. For one thing, the health law passed this time around — and statistics on hospital readmissions, for example, have already shown a notable drop in the amount of care being delivered.

"The run-up to the Affordable Care Act, and the initiatives put in place by the law, are absolutely having an effect," he says. "I think providers and payers see health reform coming and they want to get ready to lower their costs."

KLIFF NOTES: Top health policy reads from around the Web. 

For health-care companies, the spending slowdown is bad for business. "In the past week, medical testing companies, such as Quest Diagnostics, medical device makers Johnson & Johnson and Abbott Laboratories, hospital operators, such as HCA Holdings Inc., and even diaper maker Kimberly-Clark, which has a surgical supply unit, have cited a slowdown in use of medical services." Bill Berkrot in Reuters.  

Did a mistaken vote just kill Montana's Medicaid expansion? "A contentious Medicaid proposal to fund private health insurance for thousands of low-income Montanans appears dead at the 2013 Legislature, after House Republicans on Friday successfully bottled up the bill in committee. A move by Democrats to bring the measure to the floor failed by a single vote, with one Democrat later admitting he voted the wrong way. A later effort to undo the first vote failed by three votes." Mike Dennison in the Missoulian

Meanwhile, Louisiana Gov. Jindal has seven reasons why his state shouldn't expand Medicaid. "The billions of dollars obligated for Medicaid expansion will make a likely target for future deficit reduction talks in Congress. Louisianians know better than most that federal funding is never guaranteed. Indeed, the federal government has cut $1.8 billion in Medicaid funding for Louisiana and dropped the Medicaid match rate to its lowest point in 25 years." Bobby Jindal in the Daily World

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