It was nice while it lasted, but it’s over and may not return for many years, if ever. The “it” is the slowdown in national health spending.
From 2008 to 2013, health spending grew roughly 4 percent a year, which was less than half the 9 percent average of the three decades before the Great Recession. Because the 4 percent rate matched the economy’s overall growth, health spending stabilized at 17.4 percent of gross domestic product (GDP). There was some hope that an era of sizable increases was over.
Forget it. Government actuaries from the Centers for Medicare and Medicaid Services (CMS) last week reported that health spending in 2014 rose 5.5 percent to $3.1 trillion. Worse, spending is projected to increase 5.8 percent annually between now and 2024. That’s faster than the economy’s expected growth, so health costs would rise to 19.6 percent of GDP by 2024. The gain in GDP share (from 17.4 percent to 19.6 percent) may seem small. Not so. It’s worth almost $400 billion a year. (All these dollar and GDP figures are unadjusted for inflation.)
So it’s back to the future. Health spending will silently shape the nation’s priorities. It will squeeze take-home pay, as employers devote more of their compensation to insurance and high deductibles raise workers’ out-of-pocket expenses. Government will spend more on Medicare (government insurance for the aged) and Medicaid (insurance for the poor). Other programs will compete for a smaller pot — or taxes will rise. The only good news, assuming the actuaries’ projections come true, is that spending has slowed from its pre-recession trajectory.
All this poses intriguing questions: What caused the spending slowdown? Why has it stopped?
“There’s a great debate about how much [of the slowdown] is due to the economy and how much is from health system changes,” says Drew Altman, head of the Kaiser Family Foundation, a health-care think tank. Altman figures that the weak economy was the main cause, explaining about 60 percent of the slowdown, as people “put off care that they [could].”
But when the economy recovers, the trend reverses. Not surprisingly, the CMS actuaries cite improving economic conditions as one factor fueling the rebound in health spending last year and in the future. Another factor in 2014 was an 8.4 million surge in Americans with health insurance, mostly reflecting the Affordable Care Act (ACA). People with insurance use more health services than people without.
Looking ahead, the CMS actuaries say that the aging population will boost spending as more people move into Medicare (up 19 million by 2024, or 37 percent) and Medicaid (also up 19 million, 33 percent). As people age, their health costs rise. Medicaid is hit both by an aging population — it covers nursing home care for the poor elderly and disabled — and liberalized eligibility requirements under the ACA.
Cushioning these increases are changes in the health-care payments system. As part of the ACA, Congress reduced Medicare reimbursement rates for hospitals and some other providers. There has also been a surge in high-deductible insurance policies provided by employers. Higher deductibles are thought to discourage spending by shifting some costs to patients. In the past five years, reports Kaiser, the average deductible in employer-provided insurance has risen from $826 to $1,217. The share of single workers covered by a deductible exceeding $1,000 has doubled from 22 percent to 41 percent over the same period.
Still, Altman doubts that higher costs will trigger a broad debate over controlling spending. “It’s just too tough,” he says. “There are too many interests at stake. We don’t even agree what the problem is. If you ask the public, it’s fraud and abuse — ‘we’re being ripped off.’ If you ask experts, you get a whole different answer.” Experts tend to blame the fee-for-service reimbursement (which rewards providers for doing more), weak regulation or expensive new technologies.
That’s why the spending slowdown seems dead: It can’t be stopped by markets or politics.
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