Are we finally controlling health spending? Few issues loom larger in the economic outlook. For years, spiraling health costs — mainly for Medicare and Medicaid, which serve the elderly and the poor — have consumed a growing share of the federal budget. Meanwhile, rapid increases in premiums for employer-provided insurance have squeezed take-home pay. So it’s good news that, for the third straight year, health spending rose modestly in 2011. To some analysts, this signals a new era of cost-containment. Well, maybe — and maybe not.
First, let’s examine the numbers, then what they mean.
A report from the Centers for Medicare and Medicaid Services (CMS), published in the journal Health Affairs, finds that health spending in 2011 grew only 3.9 percent, almost identical with growth of the economy (gross domestic product). As a result, health spending as a share of GDP has stabilized at 17.9 percent since 2009. In 2009 and 2010, spending also increased 3.9 percent annually. These rates are much lower than in the past. From 2003 to 2007, annual growth averaged nearly 7 percent.
Most spending categories showed small increases: private health insurance, up 3.8 percent; Medicaid, 2.5 percent; the Children’s Health Insurance Program (CHIP), 3.0 percent; out-of-pocket spending, 2.8 percent. There were two significant outliers: the Department of Veterans Affairs, up 8.7 percent (reflecting in part expanded services for Iraq and Afghanistan veterans); and Medicare, up 6.2 percent. CMS attributed Medicare’s increase to “a one-time change in payment rates to skilled nursing facilities” and more spending on doctors.
What’s harder to know is whether the spending slowdown is temporary or permanent.
Unsurprisingly, Health and Human Services Secretary Kathleen Sebelius claims that the Affordable Care Act (“Obamacare”) lowered costs. Actually, the CMS study said the law’s direct impact was “minimal.” Some provisions increased spending; others reduced it. Sebelius would have been on stronger ground if she had made a more subtle argument: that Obamacare’s controls — though not directly reducing spending — inspired greater cost-consciousness among providers.
Hospitals, doctors and medical suppliers are frightened. They recognize that the free flow of money into health care won’t continue. Government will limit reimbursements and spending; the ACA already cuts hospital reimbursement rates and requires deeper discounts from drug companies for Medicaid. Anticipating a stingy future, providers are starting to restrain costs. That’s the theory.
Contributing to the pressure is the rapid growth of “consumer-directed” health plans: a Republican favorite that, though cited in the CMS report, goes unmentioned by Sebelius. By 2011, 17 percent of privately insured workers were in “consumer-directed health plans,” a doubling from 8 percent in 2008. These plans have lower premiums and larger deductibles, arguably making consumers more cost-conscious for routine visits and procedures. This too could cause providers to be more competitive.
Of course, all this may be wishful thinking. Slower health spending may be a blip. The CMS study says the main cause is the weak economy. People lost insurance and, as a result, use less medical care. They go to doctors’ offices less often, delay elective operations and skimp on drugs. From 2007 to 2010, private insurance coverage dropped by 11.2 million; although Medicaid enrollment rose by 7.5 million, the number of uninsured still increased by 7 million. Even the insured may skip care in tough times to avoid deductibles and co-payments.
A stronger economy may accelerate health spending. In past recessions, spending and insurance coverage weakened. Once the economy recovered, spending rebounded. This could happen now.
Two other trends also suggest higher spending. First, Obamacare’s main provisions take effect in 2014; an estimated 30 million or more uninsured Americans may get coverage. Susan Dentzer, editor in chief of Health Affairs, notes that the uninsured use about two-thirds of the health services that the insured use (costs are often shifted to others); as the newly insured use more health services, spending could rise significantly. The second trend: Aging baby boomers are entering their sickest years and Medicare eligibility.
Indisputably, health care remains an economic monster. In 2011, its spending totaled $2.7 trillion, or $8,680 for every man, woman and child in America. What happens next is anyone’s guess. But don’t bet that the monster has been tamed.
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