October 16, 2012
Slower Growth in Health Costs Saves U.S. Billions
The U.S. continues to experience a very marked slowdown in the growth of health-care costs, despite some widely misinterpreted new reports. And a growing body of evidence suggests the deceleration is driven by more than a temporarily weak economy -- which is good news for the federal budget and for workers.
National health expenditures rose just 3.8 percent from August 2011 to August 2012, according to an Oct. 11 report from the Altarum Institute. And Medicare spending increased by only 3.2 percent in the fiscal year ending in September 2012, according to theCongressional Budget Office.
These are remarkably low growth rates. Consider that over the past four decades Medicare spending increased by more than 10 percent a year.
Nevertheless, last month, many commentators falsely declared the end of the slowdown -- largely exaggerating the findings of a reportissued by the Health Care Cost Institute. That report showed expenses for those with employer-sponsored insurance rose 3.8 percent in 2010 and 4.6 percent in 2011.
This modest change was initially described as a “surge.” Yet by historical standards even 4.6 percent growth is very low -- and one shouldn’t make too much of a 0.8 percentage-point change from one year to the next. What’s more, employer- sponsored insurance is only one component of total health spending.
The Altarum figures, which cover total national-health expenditures, also showed a modest acceleration in 2011 -- but then the pace slowed again. “Our data indicate that the 2011 acceleration was not sustained,” the report notes. “Spending growth declined in the latter half of 2011 and dropped even further in the most recent months.”
So long live the slowdown!
There is good reason to think that lower growth will persist even after the economy turns around. For instance, costs have decelerated more for Medicare than for employer-sponsored insurance, suggesting that the shift isn’t entirely caused by the slow economy.
And a new survey conducted by the Health Management Academy of industry leaders indicates some reasons why growth rates might remain low. The academy asked chief executives of health- care systems two key questions: What share of your revenue in 2020 will be derived from payment schemes other than fee-for- service? And what share of clinical decisions made in 2020 will be supported by software programs? The average responses were 62 percent and 95 percent, respectively.
In other words, health-system leaders are anticipating two significant shifts over the next eight years: away from fee-for- service payments and toward clinical-decision support. Both of these changes promise to improve value and slow cost growth.
How much difference can slowing health-cost inflation make? Consider some recent calculations from two Harvard University economics professors, David M. Cutler and Jeffrey B. Liebman. They examined changes in the national health-care spending projections published by the Centers for Medicare and Medicaid Services.
In January 2009, the centers projected that expenditures would reach 19.8 percent of gross domestic product in 2017. This year, the projection for 2017 is down to 18.4 percent of GDP. That difference amounts to a whopping $280 billion. In other words, relative to the projections issued three years earlier, today’s forecasts suggest health savings of $3,500 per family of four by 2017.
Over the past few decades, middle-class workers have struggled as their incomes have stagnated in the face of globalization and technological change. If labor compensation hadn’t fallen so much as a share of national income, American workers would be enjoying about $750 billion more in take-home pay. Yet estimates suggest we are currently spending about that much each year on health-care costs that don’t improve health outcomes -- and this unnecessarily depresses take-home pay.
There isn’t much that policy makers can do to restore the $750 billion in lower labor compensation. But there is plenty they can do to get rid of waste in health care, which would fill in much of the gap in take-home pay. That is why we should be doing everything we can to perpetuate the slowdown in health- care costs.
(Peter Orszag is vice chairman of corporate and investment banking at Citigroup Inc. and a former director of the Office of Management and Budget in the Obama administration. The opinions expressed are his own.)
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