Are slower-growing health care costs temporary or permanent?

It’s one of the hottest debates in health care: Is the historically slow growth in health spending in recent years due to the lingering effects of the recession, or is it a fundamental change that augurs well for the future? The implications are huge – if policymakers think the slowdown is only temporary, they might try to take steps to cut Medicare spending further, for example; if they think the improvement is permanent, they might cross their fingers and hope for the best.

This won't hurt a bit. But it may save some money (Chris Ratcliffe/Bloomberg)
This won't hurt a bit. But it may save some money (Chris Ratcliffe/Bloomberg)

The latest salvos in the battle come from the Federation of American Hospitals, which represents for-profit hospitals, and PwC’s Health Research Institute. Both argue in new studies out today that a big chunk of the slowdown is structural -- and won’t disappear as the economy improves.

Dobson DaVanzo & Associates, in a report for the hospital group, concludes that if present trends continue Medicare savings will be $1 trillion more in the next 10 years than the savings projected by the Congressional Budget Office in May. The changes, Al Dobson said in an interview, are the result of marketplace pressures and the Affordable Care Act, which set new penalties for hospital readmissions, and included bundled payments and other incentives for hospitals and doctors to find ways to cut costs without hurting patients.

But why assume present trends will continue? For one thing, won’t the aging of the Baby Boomers drive up Medicare spending? The answer Dobson argues, is counter-intuitive: At least for the next several years, Baby Boomers will be the youngest people on Medicare, a positive trend, cost-wise. That gives the nation a “respite,” he contends, to figure out how to handle needed entitlements changes. “We have 10 years to figure this baby out,” he says. “If we don’t, it could be pretty messy.”

PwC  uses a medical cost trend--or growth rate--that measures the changes in the cost to treat patients and is influenced by the cost of products and services and utilization. The projection is based on interviews with health plans, a survey of employers and other data. They conclude that health-care spending growth will dip to 6.5 percent next year, adding that the slowing of health-care spending “defies historical post-recession patterns and is likely to be sustained” even as millions of uninsured Americans enter the health system next year.

“The long-term trends suggest that as the economy improves, the cycle of runaway cost increases will be broken,” said Michael Thompson, principal with PwC’s human resource services practice.

Chip Kahn, president and chief executive officer of the hospital group, is upfront about how he wants to use the study: To persuade Congress to avoid additional Medicare payment cuts for hospitals. “Enough is enough,” he says, “let’s let all this play out.”

But the new reports fly in the face of research from other smart policy types, including Drew Altman and Larry Levitt of the Kaiser Family Foundation. In an April op-ed in the Washington Post, they said talk about the taming of health-care costs surfaces every so often, but that the hopes are inevitably dashed: “We have seen this movie before,” they wrote.

An analysis Kaiser conducted with the Altarum Institute found that health spending grew by 4.2 percent per year from 2008 to 2012, down from a peak of 8.8 percent from 2001 to 2003 – and that most of the slowdown – 77 percent -- was due to years of a weak economy “which causes people to put off health services when they can and prompts employers and states to reduce health spending. The other 23 percent is explained by changes in the health system, including increased consumer cost-sharing, tighter managed care and modifications in payments and delivery.”

Contacted Monday, Levitt reiterated his view: "Over the last five decades, there has been a remarkably close relationship between the ups and downs in the economy and the ups and downs in health spending growth rates. The historic slowdown in health spending that we're seeing now is consistent with that historical pattern, though there also appear to be significant structural factors at play as well."

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Evan Soltas · June 18, 2013

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