Call it the $2.8 trillion enigma. That’s the amount Americans spent on health care in 2012. The good news is that health spending slowed unexpectedly for the fourth consecutive year. The enigma is that no one really knows why. Despite many theories, there’s no expert consensus.
Runaway health spending is a huge national problem. It has squeezed take-home pay (employers channel more compensation to health insurance and less to salary) and is crowding out other programs — schools, defense, regulation, police — at the federal and state levels. If the slowdown is temporary, then all these problems remain. But if there’s a permanent shift, then the nation’s economic and budget outlook has significantly improved.
Let’s start with the facts, as recently reported by the Centers for Medicare and Medicaid Services (CMS) and printed in the journal Health Affairs.
In 2012, U.S. health spending grew 3.7 percent, virtually identical with the increases in 2009 through 2011 and much slower than the 9.7 percent of 2002, the latest high point. The increase was so small that health spending as a share of the economy (gross domestic product) actually shrank, from 17.3 percent of GDP in 2011 to 17.2 percent. This almost never happens. Health care as a share of GDP has been climbing steadily since 1960, when it was about 5 percent.
Note an apparent paradox. Tame overall spending contrasts with reports of hefty premium increases on the insurance exchanges established by the Affordable Care Act (Obamacare). How can both can be true? Easy. By law, the insurance plans offered on exchanges often provide more coverage than plans they’re replacing — and hence cost more.
Now, the competing theories.
● It’s the Great Recession. “Historical experience” shows, says CMS, that health spending slows for two or three years after an economic slump. Presumably, this reflects cost-conscious patients deferring elective care, some patients losing insurance (and using less health care) and general downward pressures on wages and prices.
● It’s the Affordable Care Act. Writing in the Wall Street Journal on Jan. 7, Jason Furman, head of President Obama’s Council of Economic Advisers, said the new law made a “meaningful contribution” to the slowdown, mainly by reducing Medicare reimbursements. Some cuts spilled over to private insurance, he said. By contrast, CMS concluded that the Obamacare had “a minimal impact” — some provisions raised spending, some lowered it.
● There’s been a retreat from the use of costly medical technologies. Patent protection lapsed for some blockbuster drugs (including Lipitor for cholesterol control and Singulair for asthma), allowing their replacement with cheaper generics. Drug spending rose only 0.4 percent in 2012, down from 2.5 percent in 2011. The number of some expensive surgeries (heart bypass and mastectomies for breast cancer) has also dropped.
● Higher insurance deductibles and co-payments caused consumers to be more cost-conscious. From 2006 to 2013, average deductibles rose from about $600 to roughly $1,100 in private plans with deductibles, report economists Amitabh Chandra and Jonathan Holmes of Harvard University and Jonathan Skinner of Dartmouth University in a new study. They estimate that this reduced health-care use under these plans by 1.3 percent.
Of course, these theories aren’t mutually exclusive. All could be true. Nor do they indicate whether the spending slowdown will continue. They could herald a new era of more cost-conscious medicine, as hospitals and doctors react to pressures from government and consumers.
Or maybe not. The demand for health care will probably rise, as baby boomers qualify for Medicare (older people have higher costs) and as the uninsured receive coverage under the Affordable Care Act (insurance causes people to use more health services). The economists’ study forecasts a spending rebound. The recession’s effects will fade; deductibles won’t rise rapidly forever. Finally, costly new heart-disease and cancer treatments will bloat spending with modest health benefits, their study says. These new technologies will be hard to stop, because “Medicare is legislated to pay for any treatments that won’t actually cause harm.” Changing this would seem one obvious way to perpetuate the spending slowdown.
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