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Why Obama's Optimism on Health Costs Is Premature Why Obama's Optimism on Health Costs Is Premature

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Why Obama's Optimism on Health Costs Is Premature


If doctors have changed the way they practice medicine, that could save a lot of money. But don't be so sure it's happening yet. (AP Photo/Marcio Jose Sanchez)

In his State of the Union address this week, President Obama took credit for a puzzling but welcome trend: milder increases in health care costs. “Already, the Affordable Care Act is helping to slow the growth of health care costs,” Obama declared.

But the president’s optimism may be premature. It is true that the United States has just experienced four straight years of modest health care growth, a trend with huge implications for the federal budget, wages, and household budgets. If the slow growth lasts, it could mean the end to yearly spikes in insurance premiums. It could tame federal deficits for years to come and also help to ease state budget woes. But what’s causing the trend and whether it’s here to stay are big unanswered questions.


“If anybody tells you they know, they’re lying,” said Bill Hoagland, a senior vice president at the Bipartisan Policy Center and a former Cigna executive and Senate Budget Committee staff director.

Some health economists have begun declaring victory. As The New York Times reported this week, there are a growing number of optimists who insist the recent trend is more than just a blip. The thinking is that the slower spending growth is not only  the result of the recession or random factors such as weak flu seasons but reflects changes in the ways that doctors and hospitals are delivering care—changes that will stick around or accelerate as the health care law leads to better pay for doctors with systems that reward efficiency.

The Congressional Budget Office has embraced this idea. In its new budget outlook, released last week, the nonpartisan budget experts ratcheted downward their expectations for government spending on Medicare and Medicaid in the coming years. Since March 2010, CBO has slashed its spending forecasts for the program by 15 percent, or about $200 billion. That huge number doesn’t include direct legislative cuts.


But the truth is that no one really knows what’s causing the slowdown. It has surprised nearly everyone, and the timing and size don’t line up with any of the usual indicators. The trend started before the Affordable Care Act was passed, for example, and has continued several years after the official end of the Great Recession. It’s possible the Affordable Care Act is helping, but it’s unlikely that it's a big factor because most of its provisions have barely been implemented. In the last year, there’s been a vibrant academic and think-tank literature of possible theories, but all the articles make clear that the explanations are still speculative and unproven.

Until we know for sure, here are a few reasons some health economists remain cautious:

  • The recession is over, but the economy is still lousy. Health spending tends to slow down a few years after an economy-wide slowdown. So the combination of the timing and the weak recovery means that what looks like a change in medical practice could be people simply holding off on medical care because they’re worried about their finances.
  • Health spending has a history of peaks and valleys, including an extremely promising slowdown in the 1990s that accompanied the growth of managed-care organizations. A few years later, health costs spiked again. “Right now, everybody is optimistic and hopeful that this will make a big difference. But if you’ve been around long enough, and I’m afraid I have, you look back,” said Rick Foster, who retired recently as Medicare’s chief actuary, responsible for trust-fund predictions. “I wish I was more confident.”
  • New payment methods haven’t spread too far, and early results are mixed. Only about 5 percent of medical providers are currently part of the health law’s much ballyhooed Accountable Care Organizations, for example. Recent data from Massachusetts, one state in the country where many providers are being paid according to new methods, suggests that the switch hasn’t done much to slow growth there so far. One place the Affordable Care Act has already changed payments is for hospital readmissions—the times when someone leaves the hospital only to boomerang back in within a month. Readmissions got a public-policy push because they were seen as a good indicator of whether hospitals were making changes to improve quality and reduce costs. But a study out this week from the Robert Wood Johnson Foundation found that the rate of readmissions barely budged between 2008 and 2010, years in the slow-growth window.
  • We’ve gotten lucky on prescription drugs. Several big, blockbuster drugs have lost their patent protection in recent years, meaning huge savings as people switch from popular drugs like Lipitor and Plavix. That trend will not continue for much longer. The new expensive drugs tend to be specialty products that won’t have cheap generics. And there’s always the possibility of another mass-market drug, like one for obesity or Alzheimer's, which will be good for public health but expensive to prescribe widely.
  • Health spending is still on track to rise as more baby boomers retire. The population is aging, and nationwide, older populations tend to be sicker and need more care, however efficiently delivered it may be. And there’s good evidence that the boomers may be more obese and less healthy than their parents.

Balanced against those worries, there is hope. The Affordable Care Act is pioneering new ways of paying for health care, and some provisions may speed along the kind of structural changes that the optimists believe are already under way. Even if the health law isn’t a major factor in the current slow health care growth, it may well play a big role in reining in costs in the future. 

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