Health Care Spending Slowdown: Don't Jump For Joy Just Yet

Reports and news stories abound with news of a slowdown in national medical spending over the past few years. Indeed, from 2009 to 2011, growth in health expenditures has remained relatively steady at 3.9% annually - moreover, in 2010, the gap between GDP growth and growth in health spending was only 0.1%, while in 2011 GDP grew 0.1% faster than health spending. If this trend can be sustained, the story goes, we may finally be seeing health care spending growth reach a plateau. Unfortunately, a few sobering facts make this unlikely.

2 Years of Growth Are a Poor Prediction

Evaluating the optimistic claim, Victor Fuchs writes in the New England Journal of Medicine:

Some observers place great emphasis on the particularly slow growth of national health care expenditures in 2010 and 2011. How useful is the experience of growth over a period of 2 years...[t]he answer seems to be not at all.

Fuchs compares 2-year rates of growth in health care spending and the subsequent 20-year growth rates, finding that there is surprisingly a negative relationship, but one that isn't statistically significant. Indeed, it seems odd to take the results of 2 years of growth and assume that they are indicative of a new, long-term trend. The Great Recession without a doubt contributed to a slowdown in health care spending (and utilization) as well - so unless we are entering a "new economic normal" of perpetually weak growth (certainly undesirable no matter how much it slows health care spending) examining two years of growth in a vacuum speaks little about the future of health care spending.

Even as costs for certain segments of the health care market (like inpatient services or pharmaceuticals) grow slower than before (for instance, part of the slowdown in health spending has been attributed to the "patent cliff" that hit pharmaceutical companies), costs will continue to grow - and there is little reason to think that the dynamic of health care costs growing faster than GDP will change in the near future.

Demographic Changes Will Grow Health Spending

Not only is a two-year benchmark a poor estimate for the next decade, it also ignores something that is almost a cliché - the population is aging, and aging fast.

aging_pop.png Source: Census Bureau

According to Census Projections, the elderly population will skyrocket by 2030 - and this trend will continue unabated to 2050. By 2050, the percentage of the population that is 65 years and older will grow to 20 percent, from around 13 percent in 2010. And while this may be a long-term trend, the short-term doesn't look much better either. In their recent updated budget outlook, the CBO notes that an aging population will play heavily into increasing deficits in the later part of this decade.

An aging population means more individuals with health care needs that include chronic diseases like diabetes and Alzheimer's - all of which are expensive and difficult to treat.

Obamacare Expands Health Insurance Coverage

Although in the long-run, and relative to the total size of our health expenditures, this may not be very much, Obamacare is projected by CMS to increase health care spending by about $500 billion over 10 years. As my colleague, Paul Howard, and I discussed at great length in a recent report, Obamacare's focus on a comprehensive insurance expansion along with reducing out-of-pocket spending means that under any and all assumptions, the law will certainly increase health care costs and spending.

Simply put, having more people with comprehensive insurance coverage that covers everything from routine doctor's visits to $9 birth control pills, will result in more people using health care resources - all culminating in greater health expenditures.

Fundamentally, all evidence points to the dip in health care spending growth being a temporary slowdown. Without radical reform to our health care system that encourages (rather than discourages) thriftiness with health care spending (by focusing on high-deductible plans and HSAs) and without broad reform to major government health programs (as opposed to gimmicky savings under Obamacare) health care spending growth will grow unabated. 

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