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Studies: Thank the recession for the health spending slowdown

The future of health spending is one of the sector's hottest debates. (Flickr user carbonnyc)

Some of the best news for health care in a while is also driving one of its biggest debates — what exactly is behind the historic slowdown in health-care spending these past few years. Just how much credit should be given to structural changes in the health-care system versus the effects of the Great Recession? The answer has major fiscal implications for the country's future as the economy improves and millions more gain health insurance under the 2010 health-care law.

Previous research has tried to answer this question, but a new Health Affairs study finds that the recession gets most of the credit for the recent slowdown in the growth of health-care spending, suggesting that an improving economy could accelerate health spending once again.

After the annual growth rate for health care spending averaged 6.6 percent between 2000 and 2007, it shrank to just 3.3 percent each year between 2008 and 2011, according to the authors' analysis of federal data. During those three years, the slumping economy accounted for 70 percent of the spending slowdown, according to a new peer-reviewed study from economists at the Kellogg School of Management at Northwestern University. A separate working paper released Monday from the Brookings Institution also argues the slowdown is largely the result of the two previous recessions.

One thing the Northwestern paper can't answer, however, is what's contributed to the slowdown since 2011, when major features of the Affordable Care Act started to kick in. Notably, its major coverage expansion, which took effect at the start of this year, is expected to drive up health spending. Meanwhile, reforms in the law meant to encourage better and more efficient care — which can reduce the spending pressures from the newly insured — are still in their early stages.

"It's very possible that the trend for health-care spending to go back up as [the economy recovers] could very well be offset by the impact of the Affordable Care Act and other trends that we're seeing in health care," said Northwestern's David Dranove, who co-authored the study with colleagues Craig Garthwaite and Christopher Ody. We just don't know yet if it will, he said.

Using claims data from three major health insurers, the economists examined the health spending of people with employer insurance in metropolitan areas hit especially hard by job losses during the recession compared to those areas that were the least affected. They found the hardest-hit areas hit saw the smallest increases in health spending.

For example, the Las Vegas area, which suffered greatly during the downturn, saw its employment-to-population ratio decrease 5.6 percentage points between 2008 and 2009, while health spending increased just 5.4 percent between 2007 and 2011. Trenton, which saw its employment-to-population ratio decrease just 1.6 percentage points, had a 29 percent increase in health spending over the same time period.

Overall, the study authors found that health spending growth between 2009 and 2011 slowed 2.6 percentage points compared to the previous two years. Based on employment data, they calculated the health spending growth would have been 1.8 percentage points higher in a better economy — that's where the 70 percent figure comes from.The other 30 percent is then likely a mix of structural changes in the health-care system, the result of patents expiring for expensive brand-name drugs and some effects of the ACA.

Their data, however, do not speak to what's behind the slowdown since 2011. Interestingly, the past two quarters haven't shown the big expected increase in health spending as millions more gained insurance under the health-care law. Health spending actually shrank 1.4 percent in the first quarter, which was a major revision from the Bureau of Economic Analysis's original projection that it would grow by 9.1 percent. The second quarter saw health spending grow just .7 percent while GDP increased 4 percent, but these initial figures are likely to be revised over the next few months.

All of that is to say it's still too early into the era of expanded coverage to determine the future of health spending, which accounts for about one-sixth of the country's economy.

"If health-care spending does show moderation going forward, that's going to suggest some remarkable changes [to the health-care system]," Dranove said.