With each passing month, evidence accumulates that health care spending growth has reset to a new, lower level. Preliminary data for 2013 show an increase in health care spending essentially equal to the growth of the economy—a rate of increase not seen for some time. Employment data show that December and January were the 2 slowest months in health care employment in over 25 years. As the troubles with the Affordable Care Act’s (ACA’s) website recede in importance, the slowing in medical spending becomes the single most important story in health care.
A good deal has been written on the causes of the slowdown, including in this Forum. The recession was certainly an important factor, but even as the economy continues to rebound, health care cost increases have yet to materialize. More important are reduced patient demand, a slowdown in the technology of medicine, and incentives for clinicians and hospitals to become more efficient.
Leave aside the “why” question, though, and consider a different issue. If health care spending growth remains low or falls even further, how will this affect the medical sector? Based on findings from across the economy, the effect will be profound and will play out in 3 stages.
Stage 1: Hunker Down
As revenue falls in any business, the first thing that companies do is eliminate surplus positions. New investments are also delayed.
Health care will likely respond in this way. Office staff can be streamlined, upgrades to facilities and equipment can be postponed, and new capital investments can be delayed.
These changes are easy but not innocuous. Fewer administrative workers often means more burdens for physicians and nurses. Capital that is not replaced becomes out of date. Over time, this would harm patient care, but generally not in the short run.
Stage 2: Reduce Clinical Staff and Their Wages
As the slowdown continues, more structural changes need to occur. With fewer overall resources, firms have to think more about how they are organized. In the corporate context, this means changes across divisions; in health care, it means taking resources away from clinical departments.
Part of the slowdown is occurring because a host of factors is curbing the growth of imaging. Hospitals responding to this are slowing the flow of resources to the radiology department. Partly for this reason, the outlook for the diagnostic imaging market is forecast to be only modest, despite a growing and aging population and the development of new types of scanners. With fewer scans done, there is less need for radiologists and radiology technicians; national data suggest hospitals and physicians’ offices, where revenue growth has been weak, have been particularly affected in this regard.
Less rapid demand almost always translates into sluggish wage growth. Radiologist salaries have been flat in the past few years, after having grown rapidly in the years before. Some physician salaries will fall, but I expect support personnel, such as nurses with many years’ experience, to bear the brunt of salary changes. As hospital revenues decline, hospitals respond by cutting back on new hires. The slowdown in hiring results in an aging of the nurse workforce. The fact that earnings of senior nurses are as much as twice that of junior nurses will create intense pressure to reduce their wages or replace them with more junior nurses. Although physician earnings increase with experience, the differential is nowhere near as large, so this pressure will not be as high for physicians.
The slowdown in demand is not without consequence for physician trainees: less demand for various medical specialists means fewer new residents will be needed. Already, Google searches for radiology imaging positions are falling, and the share of radiology residency positions filled by US medical graduates has declined with the reduction in imaging growth. Because demand can change quickly, the consequences can be severe for residents already in the pipeline. Some radiology residency programs have been cut mid-cycle as hospitals have decided to outsource their radiology department, leaving the trainees on their own.
Stage 3: Reimagine the Product
To do well, institutions have to move beyond survival and think about areas of growth. Ironically, the revenue slowdown offers many opportunities. Part of the reason that revenue is falling is because patients and payers are pressuring providers to show that they create value. Patients with high cost sharing are moving away from discretionary imaging because they are not convinced it will improve their health. Similarly, accountable care programs, bundled payment initiatives, medical home incentives, and similar payment reforms are attempts by payers to reward quality over quantity. The demand for quality is something that good health systems can meet and can be extremely profitable.
Take a specific clinical example: the treatment of lower back pain. Spending on this condition is about $80 billion annually, with estimates suggesting that much of these costs could be eliminated in a more efficient system. Many magnetic resonance imaging (MRI) scans, orthopedic consults, and surgical interventions for lower back pain have been found by clinical studies to not be associated with improved health. To the extent that people want “treatment for an injured back,” not “an MRI and reading,” the good health systems will provide this, assembling a team of primary care physicians, orthopedists, and radiologists working together to eliminate unnecessary care and ensure that essential services occur at the right time. The result is a win-win: driving out unnecessary costs will ensure that revenue constraints are met, and state-of-the-art back pain care will bring more consumers. The “back treatment industry” can be very profitable, more so than separate imaging and surgery industries.
Making this transition involves immense change: different work structures, new forms of compensation, and adjustments in the relationship to peers. For physicians, this will mean losing autonomy in some areas and gaining it in others. Treatment for an injured back is likely to involve protocols about when MRIs and orthopedic consults are provided. Neither the orthopedists nor the radiologists will have complete say in this, but all will work together in the design of protocols. Further, physicians will be empowered to meet the needs of their patients as a whole, not just provide the specific service that they have been trained for.
There will be employment opportunities created by this transition. How many people now have the job title of “health manager” for patients with back pain? We know this job can exist; money manager is a common occupation in finance. Throughout the economy, there are people involved in quality measurement, performance assessment, and system design that do not exist in health care, but should. This is where many of the no-longer-needed inpatient nurses are likely to go.
This is the challenge about cost savings in health care. The first 2 stages of saving money are difficult and unpleasant, but the third has the potential to improve medical treatment and physician and patient satisfaction. Let’s hope we make it that far.
About the author: David M. Cutler, PhD, is the Otto Eckstein Professor of Applied Economics in the Department of Economics and Kennedy School of Government at Harvard University and a member of the Institute of Medicine. He served on the Council of Economic Advisers and the National Economic Council during the Clinton Administration and was senior health care advisor to Barack Obama’s presidential campaign. He tweets at @cutler_econ.
About The JAMA Forum: JAMA has assembled a team of leading scholars, including health economists, health policy experts, and legal scholars, to provide expert commentary and insight into news that involves the intersection of health policy and politics, economics, and the law. Each JAMA Forum entry expresses the opinions of the author but does not necessarily reflect the views or opinions of JAMA, the editorial staff, or the American Medical Association. More information is available here and here.