Medical Cost Increases Are Shrinking . . . Really?

Health care costs have been rising more slowly. Although this is partly tied to the poor economy, some of the change appears to be more long lasting.

 

Without a doubt, the most important question for the federal budget: how fast will health care spending grow?

The news of the last few years has been surprisingly good. Contrary to earlier forecasts, the increases in U.S. health care spending have been meaningfully curtailed. But the critical question is whether this recent slowdown in medical cost increases will continue as the economy improves. If the recent trend were to continue, the impact on the U.S. economy and on government and household finances could be hugely beneficial.

Health Care Spending Has Increased Much Less Than Projected

From 2009 through 2011, total health spending grew at annual rate of just 3.9% per year, the lowest in the last five decades. That low pace seems to have continued in 2012 and into 2013. In contrast, between 2000 and 2007, the annual spending growth ranged between 6.2 and 9.7%.

Is Slower Growth the New Normal, or an Aberration Tied to the Poor Economy?

Economists largely agree that the deep recession and sluggish recovery are the main reasons for slowing growth in health care spending. Millions lost their jobs, and often their insurance coverage. Other struggling families had trouble paying their co-pays or deductibles and so were less likely to go to a doctor.

But the reductions in health care costs have been deeper than expected, indicating that there was more going on than just the bad economy. Now there’s lots of new data showing changes taking hold in the the health care system related to other factors:

  • The Affordable Care Act’s reduced reimbursement rates are forcing the medical establishment to bring down costs.
  • Has been less development of big, breakthrough technologies to drive up spending, after decades of saturation with new product and services.  
  • Administrative expenses appear to finally be starting to go down. Billing and collection costs are likely to fall with medical records increasingly computerized and with standard operating rules part of the Affordable Care Act (ACA) and state laws.
  • Efficiency efforts are taking hold. Examples include declining rates of hospital-acquired infections, and a new emphasis on reducing readmissions.
  • Rising out-of-pocket payments for patient is playing a major role. The portion of employer-sponsored medical insurance plans which require paying a deductible has sharply risen in the last several years, and the deductible amounts have also been rising. Patients who have to pay a larger share of their own health costs generally use less medical services.

Conclusion

As the economy continues to slowly improve, health care costs will likely climb somewhat as well. But there are other new important factors that will continue to tamp down cost increases.

Recent Articles for Further Reading

”Assessing the Effects of the Economy on the Recent Slowdown in Health Spending,” Kaiser Family Foundation, April 22, 2013.

“Health Care Cost Containment Strategies Used In Four Other High-Income Countries Hold Lessons for the United States,” Health Affairs, April 2013.

“If Slow Rate Of Health Care Spending Growth Persists, Projections May Be Off By $770 Billion,” Health Affairs, May 2013.

“The Forecast Slowdown in Medicare Spending: Is More Coming?,” Report@JAMA (Journal of the American Medical Association), February 21, 2013.

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