September 23, 2014

Health Care Cost Growth Slows, But We Still Need Long-Term Focus

A new report by the Office of the Actuary at the Centers for Medicare and Medicaid Services (CMS) found that health care spending over the past four years grew at the slowest rate recorded in more than half a century. The spending grew by 3.7 percent in 2012; since 2009 the annual rate has been between 3.6 percent and 3.8 percent.

That's down from the 5.5 percent average increase over the past decade, and well below the average annual increase of 11 percent observed in the 1980s and 13.1 percent average annual increase observed in the 1970s.

The recent slower growth contributed to the first reduction in health care costs as a share of the economy in 15 years, down to 17.2 percent of GDP in 2012 from 17.3 percent in 2011.  

It is good news that we are bucking the historical trend on health care cost growth. But the causes for this are not completely understood and thus we have uncertainty as to the sustainability of the trend.

Several factors are at work, including: the last recession and subsequent slow recovery, programs and policies initiated by Obamacare, structural changes in the health care delivery system, and a reduction in spending on retail prescription drugs, as numerous brand-name drugs lost their patents and more generics become available. How much the slowing costs can be attributed to each of these and other factors remains debatable.

Analysts will need more time, experience and data to completely understand the downward trend. And health care costs will likely accelerate to some degree with the continued economic recovery.  

Therefore, while the CMS report is encouraging, we should still be concerned about health care spending. We have yet to reconcile these favorable headlines with the fact that the ‘silver tsunami’ of an aging population is upon us and with repeated warnings by the Congressional Budget Office (CBO) that health care spending growth is likely the greatest threat to the federal government's long-term solvency.

For example, federal spending on health care is currently around $900 billion annually (25 percent of the federal budget). It is expected to grow to $1.8 trillion (30 percent of the federal budget) over the next 10 years, with most of that growth directly related to aging and longevity. The number of senior citizens will increase from 40 million in 2010 to 72 million in 2030 (an increase from 13 percent of the population to 19 percent). In addition, increased longevity tends to produce greater health care utilization.  

If health care cost growth were to return to its pre-recession pace, overall the U.S. could be spending $5 trillion on health services a decade from now, which could prove burdensome for businesses, families and individuals and creating additional pressure on government at all levels.

So while we should be encouraged by the recent slowdown in health care costs, we must not lose sight of the need to further curb cost growth over the long term. Aside from interest payments on the debt, the largest categorical increase in federal spending over the next several decades will be health care spending.

Without further progress, we will face increasing taxes or reduced federal spending on other priorities like education, infrastructure, housing and defense. Or we will face both tax increases and program cuts -- all of which tend to be unpopular.    

While growth in health care costs will likely remain one of America's most critical domestic policy challenges, there are a variety of possible solutions. These include, for example, greater transparency in pricing and quality, and moving away from fee-for-service medicine.

The states have demonstrated that they are interested and committed to doing their part (and taking the lead in some areas) to slow health-care spending (see Cracking the Code by the Miller Center). A few of their ideas include creating an alliance of stakeholders to help transform the health care system, establishing statewide baselines and goals for health care spending and quality, and using existing spending programs to accelerate the trend towards coordinated and risk-based accountable care, in which providers are partially compensated based on quality of care and costs for a population of patients.

The Concord Coalition has long-supported the ideas put forth in recent years by major groups of bipartisan officials and policy experts (see series of previous Concord Coalition blog posts).

The current consensus is built around the ideas of:

  • modernizing cost-sharing for seniors, including protections for low-income seniors, and reducing the size of benefits to those who are more well-off;

  • increasing efficiency and competition in the health care industry;

  • re-orienting incentives for doctors, hospitals, patients and lawyers to increase the value of health care delivered and received;

  • rewarding quality over quantity;

  • coordination of care.

The key is that all of us must come together to make progress. The young and the old, the right and the left, the urban and the rural, elected officials and the public, must be willing to make changes to improve the health care system and ensure the fiscal solvency of publicly funded programs.

This will no doubt prove difficult. The track record for elected officials accomplishing significant cost-control public policy changes can certainly stand improvement. But in facilitating interactive budget exercises with citizens all across America, I’ve found them to be engaged, interested and ready for the challenge.

Even though it will be a difficult job, we still need to tackle it.

This blog post was updated with some information on health care cost growth rates in previous years.