Is health spending slowing for good? Medicare’s number-crunchers aren’t so sure.

September 18, 2013

Health-care costs have, for four years now, grown at a historically slow rate. Instead of outpacing the rest of the economy, as the health sector has for decades now, medical costs have risen at the exact same rate, if not a little bit slower.

Today, we got some bad news: The Center for Medicare Services' Office of the Actuary, in a new report, does not expect this ultra-slow growth to last forever.

But there was good news, too. The actuaries do expect that, while health-care costs will grow faster than the rest of the economy, it will still be at a markedly slower rate than in  years past.

"Although the growth rate going forward is faster than what it has been during the recession, it's also slower than what it's been in previous years," says Gigi A. Cuckler, an economist who lead the Office of the Actuary's research, published today in the journal Health Affairs

If you start looking back two decades ago to 1990, as this chart does, it shows that back then, health-care costs grew by 11.9 percent.

At the starting point in 1990, what we’re showing is 11.9 percent. And from 1990 up through the start of the recession, health costs grew at an average rate of 7.4 percent.

Going forward — and even accounting for the health law's massive insurance expansion — the forecasters expect costs to grow more slowly, at an average rate of 5.8 percent between 2012 and 2022. That will mean, by 2022, we will spend 19.9 percent of our economy, or $5 trillion, on health-care costs.

Medicare actuaries aren't convinced that this tells us something about a big structural change in our health-care system, one that has caused us to reduce our health-care spending permanently.

"Our perspective is, while there are certainly a lot of factors affecting the health-care sector, we're taking a bit more of a cautious approach to declaring these changes structural and permanent," Medicare economist Stephen Heffler says. "The work we've done has shown there's a strong relationship [between economic downturns and slower health spending]. Until we have evidence that its been broken, its difficult for us to conclude that something structural has occured."

So why would health-care costs grow slower in the coming decade, if not for a structural change? Heffler has to do with slower growth in the overall economy, which typically depresses the amount of health care that people consume. And there's also the impact of the Affordable Care Act, which implemented a number of cuts to Medicare payments, expected to slow the growth of federal health spending.

"Health spending has typically been about 2 percentage points higher than overall growth," Heffler says. "We have it growing 1 percent point faster than that average growth of the economy."

All of these estimates depend, it's worth pointing out, on the Affordable Care Act's cuts to Medicare providers sticking around. That's not guaranteed: As we've seen with the sustainable growth rate, Congress is willing to step in and prevent these cuts if they see them as especially drastic. This is something that Rick Foster, former chief actuary at Medicare, has worried about with the health law. If those cost controls were to disappear, it would likely mean a higher level of spending than what the actuaries currently predict.

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Lydia DePillis | September 18, 2013