Health Care Spending Levels Off: Temporary Blip or Start of a Trend?

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The nation’s health care bill rose by less than 4% in both 2009 and 2010. In 50 years, health care spending has never increased at such a slow pace. Could this mean that, after a half century of eye-popping inflation in health care expenditures, efforts to rein in costs are actually working?

According to a new report published in the journal Health Affairs, total U.S. spending on health care rose by 3.9% in 2010, following on the heels of a record-low increase of 3.8% in 2009. In the 1980s and ’90s, by contrast, it wasn’t uncommon for total national health care spending to rise by over 10% annually. For years, health care spending grew faster than GDP, devouring a larger and larger share of the country’s resources, while leaving less for other national priorities such as education and the environment.

The new report, prepared by analysts at Medicare’s Office of the Actuary, shows that in 2010, health spending finally leveled off at a steady 17.9% of GDP. How did that happen? According to the Actuary’s economists, the recession and the continued sluggishness of the economy were responsible for slowing the rise of health care outlays:

“Persistently high unemployment, continued loss of private health insurance coverage, and increased cost sharing led some people to forgo care or seek less costly alternatives than they otherwise would have used.”

In other words, they’re arguing that health care isn’t really getting cheaper. It’s just that hard times have been forcing Americans to skip needed care, bringing overall expenditures down. This, the report claims, is the main reason outlays for hospital care rose by only 4.9% in 2010, down from 6.4% in 2009. Thus, the deceleration in spending is not good news at all.

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The report itself shows that the recession isn’t the end-all explanation for newly slow growth in health care spending, however. For instance, in 2010, total retail prescription drug spending grew by a record low of only 1.2%, in large part because more patients are taking generic drugs. This is probably not a temporary response to a dip in the economy. Once patients become accustomed to generics, they are not likely to go back to over-paying for brand names. The decline also suggests that doctors are becoming more cost-conscious when prescribing.

Moreover, it is hard to make the case that the economic downturn was a major factor determining the decline in Medicare spending—which rose by less than 4% during the first eight months of 2011, a significant drop from average annual increases of 9.7% from 2000 through 2009. After all, most seniors are retired; they haven’t lost jobs, or their insurance. Granted, Medicare cost-sharing has risen, but 90% of seniors have supplemental MediGap or Medicare insurance that cover many out-of-pocket costs.

Peter Orszag, former director the Office of Management and Budget, called attention to the decline in Medicare spending in a Bloomberg column last summer: “We don’t yet have enough data to tell for sure what’s causing the recent deceleration in Medicare spending — or whether it will last,” Orszag wrote. “But some evidence suggests it may be a shift toward value in the health-care sector” as hospitals prepare for reform, and strive “to become more efficient now.”

The report also acknowledges that Medicare spending on hospitals increased just 4.6% in 2010 (after climbing by 5.3% in 2009) “primarily because” Medicare began slicing overpayments to Medicare Advantage insurers. The Congressional Budget Office estimates that a continuation of fewer overpayments to Advantage insurers, combined with the trimming of annual increases in payments to hospitals and nursing homes (but not to physicians), plus provisions of the Affordable Care Act (a.k.a., Obamacare) designed to reduce waste, fraud and preventable medical errors, will slash Medicare spending by $200 billion over 10 years.

Of course, no one knows for sure what will happen when the recession finally ends. If Americans are postponing necessary treatments, one can expect health care outlays to spike once again.

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Medical research points to vast amounts of waste in the system, including unnecessary tests, hospitalizations, and surgeries. Research also suggests that when the cost of care drives decisions, sometimes patients defer needed care, but they are just as likely to skip an unnecessary trip to the ER. All of this indicates that we shouldn’t expect health care spending increases to return to pre-recession levels once the recession is over.

In the end, the report raises questions we cannot yet answer: Is the slow-down merely a blip on the spending screen? Will the financial carrots and sticks in the reform legislation encourage doctors and hospitals to continue to be more cost-conscious? Can patients embrace the idea that the most expensive care is not always the best care?

Time will tell.