January 16, 2012

It turns out that there is a way to control health spending: clobber the economy. When unemployment rises, people lose health insurance. They see doctors less often; they put off elective surgery; they cut back on drugs. Even people with insurance behave similarly, because their pay may be down, they worry about job security or they want to avoid out-of-pocket costs for deductibles or co-payments. Of course, almost no one advocates this as a deliberate policy. But it does seem to work. Call it the Neanderthal Cure to Health Costs.

Just last week, new government figures provided fresh evidence. In 2010, U.S. health spending rose a modest 3.9 percent, about equal to 2009’s increase of 3.8 percent. These were the lowest annual increases in the half-century of government estimates. As a result, health spending has stabilized as a share of the economy (gross domestic product). It was 17.9 percent of GDP in both years. In 2010, this amounted to $2.6 trillion, roughly $8,400 for each of the 309 million Americans.

Analysts at the Centers for Medicare and Medicaid Services (CMS) attributed the spending slowdown directly to the weak economy. The effect “occurred more quickly than ... in previous recessions,” they wrote in the journal Health Affairs. One reason was a steep decline in private health insurance coverage, which dropped 10.9 million people, or 5.5 percent from 2007 to 2010. Another was weak family income (“the lowest median inflation-adjusted household income since 1996”).

The government’s new estimates trace the daunting contours of health spending. Consider:

● Led by Medicare and Medicaid, government health spending ($1.164 trillion in 2010) now represents 45 percent of the nation’s health bill, up from 41 percent in 2007.

● Direct household spending on health care ($726 billion) accounts for 28 percent of the total, a historic low. (Household spending includes payroll taxes, insurance premiums, deductibles, co-payments and other out-of-pocket costs.)

● Hospitals ($814 billion) and doctors ($689 billion) represent the largest shares of health spending. Drug costs ($342 billion) are a distant third.

Naturally, there’s skepticism that the spending slowdown will continue. “Once people starting feeling more secure,” says Larry Levitt, a senior vice president at the Kaiser Family Foundation, “they’ll start using health services again — and costs will go up.”

Still, some downward pressures on spending might persist. In 2010, visits to doctors’ offices dropped 4.2 percent, according to IMS, a market research firm. Perhaps patients will learn that some needs are better handled through a phone call or e-mail.

Another source of lower costs is the expiration of drug patents and a shift to cheaper generic drugs. For example, Pfizer’s popular cholesterol-lowering drug Lipitor went off patent in late 2011. The shift to generics can save 70 percent or more, and the pace of patent expirations is accelerating, says Michael Kleinrock of IMS. From 2006 to 2010, about 5 percent to 6 percent of drugs went off patent annually; from 2011 to 2015, the proportion will rise to 8 percent to 12 percent, he estimates.

Finally, the Affordable Care Act (aka, Obamacare) forces some spending cuts. For example, it annually curbs Medicare’s hospital reimbursement rates. “Hospitals have to make up for lost revenues by reducing costs — cutting administrative costs, using lower-cost devices and more generic drugs,” says Caroline Steinberg of the American Hospital Association. However, some experts think Congress will relax Medicare’s reimbursement rules if hospitals complain too much.

Against these downward pressures stand three powerful counter-forces: a reviving economy that eases people’s anxieties about elective spending; an aging society that raises the need for health care; and the start of Obamacare’s insurance mandates in 2014 that expand coverage by 30 million people or more. Those with insurance routinely use more health care than do the uncovered.

Health care poses a dilemma. On the one hand, we all want — for our families and ourselves — the best care available without artificial limits imposed by government regulations or private insurers. On the other, we don’t want soaring health spending to crowd out other government programs or depress take-home pay. The latest spending figures delude if they suggest we’ve overcome that dilemma. The Neanderthal Cure is an ugly stop-gap, nothing more.

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