Health care spending has been growing unusually slowly for the last several years, prompting occasional speculation that something unusual is afoot.
According to the Office of the Actuary in the Centers for Medicare & Medicaid Services (CMS), total health expenditures increased at 3.8% in 2009 and 3.9% in 2010. Recent estimates by the Altarum Institute (a not-for-profit research group) suggest higher growth—5.3%—for 2011 but only 3.9% for the 12 months ending in June 2012. These numbers were slightly higher than gross domestic product (GDP) growth for all years other than the 12 months ending in June, when the growth in health care spending was less than that of GDP.
Medicare costs have also been increasing very slowly, particularly Part B spending for physician visits and outpatient services. After increasing at an annual rate of 9% between 2000 and 2009, Medicare increased 4.3% in calendar-year 2010 and 3.8% in fiscal-year 2011. Medicare spending has also been increasing even slower than the private sector, although over the long run, Medicare and the private sector track each other pretty closely in spending growth.
Why Is Health Care Spending Increasing So Slowly?
Part of the explanation for slower US health care spending is obvious: the prolonged recession that technically ended months ago but has left unemployment stubbornly high and consumer confidence unusually low. But as journalists, analysts, and others have been noting for more than a year, the slowdown in spending in general and in Medicare spending in particular is greater than what would be expected simply by the change in per-person income during those periods.
There are several potential explanations for these findings. Jonathan Blum, MA, an Obama Administration appointee who is director of the Center for Medicare Management at CMS, was quoted late last year as saying that the strategies of the Affordable Care Act (ACA) are working—but given that hardly any ACA strategies are currently in place and even fewer were operational in 2011, that conclusion seems excessive. Economist Peter Orszag, MSc, PhD, vice chairman of global banking at Citigroup and a former director of the Office of Management and Budget, has commented on the importance of various structural changes that could help mitigate costs. In the Congressional Quarterly’s August 7 CQ HealthBeat, Orszag was quoted as saying that those offering health care services are anticipating a shift away from fee-for-service reimbursement and also are increasingly using computer software to inform clinical decision making and that these changes are essential for maintaining slower growth in health care costs as the economy picks up.
How physicians are organizing themselves to practice medicine is clearly evolving. Large numbers of physicians are choosing to become hospital employees rather than face the uncertainties of future payment changes. Many practices are adopting some form of electronic health records (EHRs) in response to current incentives and future threats to payments from Medicare. Private payers have been attempting to designate which clinicians and organizations in their networks offer high-quality, efficient care and to encourage patients to use them by lowering their co-payments or premiums if they do so. Some of these shifts directly result from changes occurring since 2009—like the incentives for the adoption of EHRs. Other developments, such as the payment changes and the designation of medical homes and high-efficiency clinicians and institutions have been under way for 5 or more years, although the ACA undoubtedly gave them new energy and attention.
There may be other explanations as well. The traditional way of looking at changes in health care spending relative to changes in per-person income may understate the effect of the recent recession, which has been extraordinarily severe in terms of its length and depth as well as its effect on wealth. In addition, the decline in home values, an important part of middle-class wealth, is particularly unusual. Given these factors and the effect they may have on an individual’s financial stability and sense of security, it is not surprising that correlating the loss just with per capita income might understate the recession’s effect.
I am also mindful of the thoughts of Rick Foster, MS, the CMS chief actuary, who told me that he doesn’t understand why Part B expenditures have slowed as dramatically as they have. If the CMS chief actuary doesn’t know why a slowdown is occurring, the rest of us might want to be a bit cautious in attributing causation.
Will the Slowdown Continue?
Whether health care spending will continue its slow growth is the really challenging question. Rick Foster also told the Washington Post last December that because he doesn’t understand why the slowdown is occurring, he would be reluctant to assume it reflects a permanently lower growth rate in Part B spending. I agree: when it’s not really clear why a phenomenon is happening, it’s pretty foolhardy to assume it will continue for an extended period.
However, some aspects of the slowdown are known. Per-person spending on Medicare is projected to increase only at about the rate of the economy for the rest of the decade. But it’s not because Medicare costs are expected to slow so dramatically, but rather because the reductions in reimbursement legislated in the ACA produce that effect. However, it’s questionable whether these reductions in reimbursement can be sustained without seriously hindering access.
It is also not unprecedented for a slowdown in spending to occur for most of a decade only to be replaced with a rapid spending period in the following decade. In the 1990s, health care spending started and ended at about 13% of the GDP. It was a somewhat different period, during which health care spending increased slower than in other decades while the economy experienced robust growth after 1992.
There are, however, some important similarities between the 1990s and today. From the early 1990s until 1997, private sector spending on health care increased unusually slowly—even slower than the GDP from 1994 to 1996. But managed care was the major cause of the slower spending, and after 1997, there was such a push-back from the public and Congress that managed care backed off its aggressive actions. Not surprisingly, private sector spending started to increase more rapidly within 2 years.
Because the push-back in private spending occurred at about the same time the Balanced Budget Act (BBA) of 1997 was passed, the slowdown in private sector spending was replaced by a dramatic slowdown in Medicare spending. The first year after the BBA, Medicare expenditures increased at about 1.5% but then declined slightly the second year and increased slowly the third year. After 2000, as noted earlier, Medicare spending increased more rapidly, partly because the strong push-backs from hospitals, HMOs, nursing homes, and others who offer Medicare services (exclusive of physicians who were being paid according to their own schedule). This resulted in several pieces of legislation that restored some of the savings incorporated in the BBA.
The current environment is not the same as the 1990s; the Federal government is plagued by large deficits and debt rather than a surplus, and there is more agreement that health care can and should be delivered more efficiently. Nonetheless, the experiences of the 1990s are a good reminder that measures that seem to work initially may not be sustainable over the long-term. Sustaining these slower growth rates going forward will be a major challenge.
About the author: Gail Wilensky, PhD, is an economist and Senior Fellow at Project HOPE, an international health foundation. She directed the Medicare and Medicaid programs, served as a senior adviser on health and welfare issues to President George H. W. Bush, and was the first chair of the Medicare Payment Advisory Commission. She is an elected member of the Institute of Medicine.
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