A mysterious shift in health spending patterns could have major implications for the fiscal policy debate—if only experts could figure out what’s behind it.
The soaring cost of Medicare and other health programs is expected to be a key driver of the ballooning federal debt in coming years, thanks to the retirement of the baby-boom generation and fast-rising health costs. But a recent slowdown in the rate at which health spending is growing has experts scratching their heads. In a Tuesday report, the nonpartisan Congressional Budget Office said new data led it to shave 1 percent from its Medicare-benefit cost estimates for the next decade. And if the historically low trend of recent years continues, billions of dollars in expected health-related spending over the next decade would be eliminated, potentially reshaping the fiscal debate. The only problem is no one knows what’s behind the recent trend or whether it will hold up.
“If it turns out that we are starting to make real structural changes that are having an effect... it calls into question what you might call the rhetoric of crisis,” says Paul Van de Water, a budget expert at the Center on Budget and Policy Priorities who has 18 years of experience at the nonpartisan Congressional Budget Office. A sustained downshift in the growth of health spending would ease, though not eliminate, pressure to make long-term changes to the nation’s health programs, he and other experts say.
There’s one, perhaps obvious, explanation to what’s happening: the Great Recession temporarily dragged down the rate of growth in health spending. Individuals may have put off health-related expenditures due to lower incomes or loss of insurance coverage, for example. But when incomes rebound or individuals get their coverage back, higher growth to spending may return.
Some economists say other, longer-lasting changes may be at play. Medicare readmissions fell in 2012, for example, and hospitals are reducing patient infection rates. Those and other efficiencies may make the trend more durable, keeping the growth rate at low levels for longer. As a result, experts are focused on trying to figure out how much of the slowdown can be attributed to one-time factors like the recession and how much can be attributed to longer-lasting “structural” changes.
Harvard economist David Cutler and researcher Nikhil Sahni think they may have found an answer: just over one third of the slowdown—37 percent—can be attributed to the recession, they wrote in a paper published last week in the policy journal Health Affairs. Plus, they point out, the slowdown in spending growth predated the recession. If the pre-recession trend were maintained, public-sector health care spending would be $76 billion less than expected by 2021. If the more recent, albeit historically anomalous, trend persists, that spending would be $770 billion less than expected. (That’s roughly half the amount of deficit reduction some experts say is needed to stabilize the debt.)
But the $770 billion figure is the most optimistic outcome: it presumes the continuation of the lowest rate of health-spending growth in more than 50 years. On balance, Cutler and Sahni conclude that most of the slowdown was due to long-lasting changes, such as more efficient policies, new trends and slower development of imaging technologies and new pharmaceuticals.
Other experts are less optimistic that the trend is here to stay.
“What happens with the recession is that it takes about six years for it to have its [full] effect on healthcare spending,” says Charles Roehrig, the director of the Altarum Center for Sustainable Health Spending, a think tank. But “the recovery is going to push healthcare spending above the normal rate and that, too, takes about six years to have its full effect,” he adds. In other words, what goes down must come up, even if spending growth stabilizes at a rate slightly below the historical average.
Economic factors not limited to the recession were responsible for roughly three-fourths—77 percent—of the health-spending growth slowdown, Roehrig and a handful of others found in an April paper for the Kaiser Family Foundation, a health-policy think tank.
“Our analysis suggests that over time the economy is by far the biggest determinant of changes in health spending overall,” they found. “Increases in health expenditures are likely to trend upwards over the coming decade as the economy returns to a more normal rate of growth.”
While experts differ on the reasons behind the slowdown and how much of it will survive the recovery, they do agree that the rate is unlikely to rise back to its historical average. And just because future growth to health spending is likely to be low, it doesn’t mean that policymakers shouldn’t pursue reforms. Even Cutler, whose study may lead some to breathe a big sigh of relief, says the government has to maintain and expand on cost-containment policies.
“The reason why cost growth is slowing is because of stuff we’re doing and the promise of what we’re going to do,” he says. The Bush and Obama administrations, for example, have publicized and penalized hospitals with high infection and readmission rates. As a result, those rates have fallen and have translated to savings, Cutler says. But such policies have to be expanded and other cost-saving policies implemented, he said. “We ought to feel good, but we ought not to feel complacent.”
The growth rate to health spending aside, there’s a more-intractable demographic problem: another 10,000 baby boomers reach retirement age every day until 2030. The situation may not seem dire ten years out, but as those boomers grow older they will need more and more health care, straining the system further. In the longer term, lawmakers will face difficult choices, such as raising taxes to historically high levels or funding Defense or healthcare programs at historically low levels. “The pressures to control health spending are unprecedented,” Roehrig says. Economic forces may bring about some change, he says, but cost-containment policies are still key to preventing a painful reckoning decades out.
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