“If something cannot go on forever, it will stop.”
— Stein’s Law , after economist Herbert Stein (1916-1999)
We all know that Stein’s Law will someday apply to health-care spending, which has risen from 5 percent of the economy (gross domestic product) in 1960 to almost 18 percent now. What we don’t know is how and when its share of the economy will stabilize. Will this result from spending controls imposed by Washington; or from delivery-system “reforms” that spontaneously cut “waste”; or from rationing, which limits spending by denying people treatment; or by some combination of these? As for when, could it be now?
Evidence of a spending slowdown is overwhelming. From 2009 to 2011, health spending remained at 17.9 percent of GDP, and actuaries at the Centers for Medicare and Medicaid Services (CMS) predict it will stay there in 2012 (final figures aren’t in) and 2013. If continued, this would have huge implications for the federal budget. Harvard economist David Cutler estimates the next decade’s savings at $770 billion. Health care’s stranglehold on other national priorities would loosen. Cutler is among those who think this is possible.
Writing in the journal Health Affairs — whose latest issue is devoted to costs — he and economist Nikhil Sahni argue that the slower spending reflects, at least partially, permanent changes. Drug costs are abating because there are “fewer new blockbusters,” and more drugs are “coming off patent” and can be replaced by cheaper generics. Hospitals are growing more efficient; since 2001, the University of Pittsburgh Medical Center has “reduced its rate of hospital-acquired infections by 85 percent,” they report. More cost-sharing (higher deductibles and co-payments) has curbed use, they say.
Cutler’s optimism isn’t universal. A study by the nonpartisan Kaiser Family Foundation and the Center for Sustainable Health Spending attributes 77 percent of the spending slowdown to the Great Recession, the weak recovery and low inflation. People lose private insurance; their health spending falls, though it doesn’t disappear. Even those with insurance are more careful about out-of-pocket costs. In 2011, both hospital admissions and the number of filled drug prescriptions declined slightly, reports the Health Care Cost Institute. By this view, a stronger economy will cause health spending to reaccelerate.
Another skeptic is Paul Hewitt, research director for the Council for Affordable Health Coverage. He says that 70 percent to 80 percent of hospitals’ and physicians’ office costs are labor: all the doctors, nurses, administrators, aides and clerical workers. “Wages and health costs rise together,” he says. High unemployment has held down wages, which will increase if the recovery strengthens.
Two other pressures suggest higher spending.
First, the main provisions of the Affordable Care Act (“Obamacare”) are scheduled to take effect in 2014. The CMS actuaries project that 22 million people will become insured and that total health spending will rise to 18.2 percent of GDP. The insured use more health services than the uninsured.
Second, an aging and sicker population automatically boosts spending. In 2009, per capita health spending for those 65 and over was $9,744 compared with $2,739 for adults 25 to 44, reports the Kaiser Family Foundation. As the elderly’s ranks swell, Medicare spending as a share of GDP will rise from 3.7 percent now to 5.1 percent by 2035 even if “excess” medical inflation vanishes, projects Harvard economist Michael Chernew in Health Affairs.
To stabilize total health spending as a share of GDP requires savings to offset these increases. The pressures to cut reimbursement (that’s already occurred for Medicare) and eliminate unnecessary or futile care — a.k.a “waste” — won’t abate. One new approach has been “consumer-directed health plans”: catastrophic insurance plans with high deductibles of $1,000 or more often coupled with “health savings accounts” to cover ordinary expenses. From 2005 to 2012, the number of Americans covered by these plans jumped from 1 million to 13.5 million, reports America’s Health Insurance Plans, a trade group. A Rand study found that families using these plans cut health-care spending by 21 percent.
“When employees see more of their own costs, they spend their money more wisely,” says Grace-Marie Turner of the Galen Institute, which advocates these accounts.
For all its tumult, the health-care system hasn’t changed that much. Most Americans still consider health care a “right” that should not be compromised when people need it. Fee-for-service — which reimburses doctors and hospitals more for doing more — remains the dominant form of payment. These have been engines of runaway health spending. From 1993 to 2000, spending stabilized at 13.8 percent of GDP under the restraint of “managed care.” But a public backlash weakened this discipline. Whether the present slowdown suffers the same fate may depend on whether Americans are willing to modify long-standing attitudes and practices about how medical care is delivered.