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September 2014 (Volume 92)
Gail R. Wilensky
There is no disagreement that over the last several years, health care spending has been growing at an unusually slow rate. It began to slow in 2007 and has been growing at historically low rates since then, at least until the fourth quarter of 2013. The question is whether the slower growth in spending from 2007 through mid-2013 or the faster growth since then is more likely to be in our future.
What’s Been Happening?
From 2009 through 2012, health care spending rose at an average annual rate of about 3.9%, compared with a rate of 5.9% during the previous decade. Although the growth in spending was particularly high during the beginning of the last decade, it had already begun to slow by 2007.
These numbers are not in dispute; what is in dispute is the reason for the slowdown, which, in turn, influences expectations of whether the slowdown is likely to continue in the future and for how long.
The deep recession from 2007 to 2009 and the slow, anemic recovery that followed clearly contributed to the spending slowdown. Less clear is how much of the slowdown can also be attributed to the ongoing changes in the types of insurance offered or to changes in the delivery system and whether these types of savings are likely to be sustainable. The most important of these changes are the substantial rise in the use of high-deductible insurance plans or plans with other types of increased cost-sharing, as well as the various shared-savings plans sponsored by both Medicare and other payers that encourage greater cooperation and coordination by changing the incentives for clinicians and institutional providers.
The Ongoing Debate
Not surprisingly, the Obama administration has been eager to attribute the slowdown to various provisions of the Affordable Care Act, such as the shared-savings programs and the Medicare readmission policies. Equally unsurprising are the debates among various policy analysts about how much the recession has contributed to the slowdown in spending, as opposed to changes in the diffusion of new technology or the insurance design of employer-sponsored insurance, and the empirical importance of each of these factors.
To me, one of the most interesting studies was a statistical analysis by the Kaiser Family Foundation and the Altarum Institute’s Center for Sustainable Health Spending, which looked at variations in the growth in national health spending relative to a variety of macroeconomic indicators over a 45-year period.1 It found that inflation in both the current year and the previous 2 years, as well as growth in real GDP in the current year and that in the previous 5 years, accounted for 85% of the variation. The analysis’s more surprising finding was the time line of the effects: economic growth influenced spending for 6 years, and inflation influenced spending for 2 years. This means not only that most of the decline in spending can be explained by the decline in economic growth but also that it will take a period of sustained economic growth before we can assess the effect of “other factors,” such as changes in insurance plan design or changes to the delivery system.
More Recent Evidence
Health care spending in February (6.7%) and March (7.1%) of this year grew at rates of growth not experienced since March 2007 and February 2005, respectively. That spending grew quickly in the early months of 2014 is not surprising, as many have been quick to mention. The rapid growth in spending as previously uninsured individuals obtained insurance coverage probably reflects their new ability to access the health care system through the Affordable Care Act. But several analysts, including Charles Roehrig, vice president of the Altarum Institute, have suggested that the annual growth rate of 10% during the first quarter should not be regarded as an indicator of the likely annual growth rate for 2014 as a whole.
Very few people have commented, however, on the revisions reported for the fourth-quarter GDP growth of 2013—before the new coverage took effect—and what these revisions may portend for health care spending in the future. Late in March, the Bureau of Economic Analysis (BEA) reported that the economy was growing at an annualized rate of 2.64%, which was up 0.27% from the 2.37% growth previously reported (but down sharply from the 4.19% reported for the third quarter).2 This revision and “improvement” in growth came largely from the BEA’s reassessment of consumer spending on services, almost all of which came from greater spending on health care. In the fourth quarter, expenses for health care grew at a 5.6% annual rate, which triggered the revision and accounted for nearly one-fourth of the 2.6% annualized growth in the GDP reported for that quarter. The increase in health spending came mostly from a rise in hospital revenue, which came as a surprise, since the number of inpatient hospital days dropped by 1% during the fourth quarter, a marked change from the previous slow growth in health care prices and spending.
The question is whether this trend in the fourth quarter of 2013 is part of what we saw in the first quarter of 2014. When viewed in this context, the dismissal of rapid first-quarter growth as just reflecting catch-up spending by the newly insured is not quite as reassuring as it might seem at first glance.
The Bottom Line
It is too early to predict whether health care spending will return to the low rates that have been reported for the last several years or whether we are beginning to see the effects of a slowly recovering economy. Even if it is the latter, the Altarum model suggests that it will take several more years for these pressures to play out. It also will take several years for us to be able to predict whether these innovations in the delivery system can and will be sustained. It is important to remember the experience of the 1990s, when health care spending started and ended the decade at about 13% of the GDP, despite earlier predictions by the Centers for Medicare and Medicaid Services that by the end of the decade, spending would account for 16% of the economy. Unfortunately, that period of slow health care spending growth and robust economic growth came to a dramatic halt one or two years into the next decade. Neither the moderation in health care spending nor the economic growth of that period proved to be sustainable.
Author(s): Gail R. Wilensky
Read on Wiley Online Library
Volume 92, Issue 3 (pages 426–429)
Published in 2014
Gail R. Wilensky, PhD, is an economist and senior fellow at Project HOPE, an international health foundation. She directed the Medicare and Medicaid programs and served in the White House as a senior adviser on health and welfare issues to President Georege HW Bush. She was also the first chair of the Medicare Payment Advisory Commission. Her expertise is on strategies to reform health care, with particular emphasis on Medicare, comparative effectiveness research, and military health care. Wilensky currently serves as a trustee of the Combined Benefits Fund of the United Mine Workers of America and the National Opinion Research Center, is on the Board of Regents of the Uniformed Services University of the Health Sciences (USUHS) and the Board of Directors of the Geisinger Health System Foundation, United Health Group, Quest Diagnostics and Brainscope. She is an elected member of the Institute of Medicine, served two terms on its governing council and chaired the Healthcare Services Board. She is a former chair of the board of directors of Academy Health, a former trustee of the American Heart Association and a current or former director of numerous other non-profit organizations. She received a bachelor’s degree in psychology and a PhD in economics at the University of Michigan and has received several honorary degrees.
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