Good news! Health spending as a share of the economy is shrinking.

January 6

The share of the economy devoted to health care fell in 2012, according to federal data released Monday.

The decline -- the largest in more than a decade -- comes after four years of unprecedentedly slow growth in health care spending.  And it has economists puzzling, yet again, over whether the slackening merely reflects the short-term impact of the recession or shows a larger, more structural change in the medical industry.

"There are two explanations," says David Cutler, a Harvard economist who served as a health care adviser in President Obama's 2008 campaign. "One is the recession was a big and drunken episode that has a very long hangover. The alternative view is that something big has actually changed."


The new data, published in the journal Health Affairs, showed health spending grew by a relatively slow 3.7 percent in 2012, about one percentage point slower than the rest of the economy. That meant health care shrunk as a percent of gross domestic product, falling from 17.3 percent in 2011 to 17.2 percent in 2012.

"If you look back at history, the last time this happened was in 1997," says Aaron Catlin, deputy director of the National Health Statistics Group in Medicare's Office of the Actuary.

health costs 1

Since 2009, health care costs have increased by less than 4 percent each year, the slowest period of growth since the federal government began collecting this information in the 1960s.

Federal officials caution that the current slowdown looks similar to the other periods that have followed a recession, where health spending tends to tick upward at a slower rate than the rest of the economy. They also said that the Affordable Care Act has had a "minimal" impact on health care spending. At most, they believe the law increased health spending by 0.1 percent between 2010, when it was passed into law, and 2012.

"The trends we're seeing in the last few years are consistent with the historical relationship between health spending and overall economic growth," says Micah Hartman, a statistician in Medicare's office of the actuary.

Hartman also pointed to a few other factors that likely contributed to 2012's slow health cost growth. Patents expired for a handful of major drugs, including cholesterol medication Lipitor and Singular, which treats asthma. With many patients switching to generic versions of these brand-name medications, spending on precription drugs grew by a meager 0.4 percent in 2012.

 A reduction in Medicare payments to nursing homes is also thought to have contributed to last year's slow health care cost growth.

"The low growth has a lot to do with onetime events," explains Charles Roehrig, director of the Center for Sustainable Health Spending at the Altarum Institute, which also tracks health care spending. "You had prescription drug growth at a really low rate primary due to these blockbuster drugs coming off patent. That's necessarily a short-term effect."

Others, however, pointed to other data to make the case that the health-care spending slowdown will likely stretch well beyond 2012. Harvard's Cutler noted the slow growth in Medicare. Costs in that program, which covers Americans over age 65, grew at 4.8 percent in 2012, a slight decline from 2011.

While those with private coverage might cut back on their health spending in a recession, "Medicare is traditionally immune to the economy," Cutler says. "This is another fascinating data point that suggests the changes now are being driven by a set of things that are different from the drivers in past years."

And while major drug patents won't expire every year, Cutler points to doctors' growing resistance to pricey medications as reason to believe growth in prescription drug spending could stay low. In 2011, Sloan-Kettering Memorial Hospital in New York announced it would not use a new cancer drug that would cost $100,000 -- after which the drug maker, Sanofi, cut the price in half.

Cutler says the downtrend in drug spending is, then, "partly a reflection of drugs coming off patent, but also a reflection of the payers getting more sophisticated, too."

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