What’s Behind the Slowdown in Health Care Costs?


Posted by Joel Wittman

In my article in the September blog, I wrote about a systemic approach to containing health care spending.  I thought this article about the slowdown in health care spending would also be of interest. 

Democrats on the campaign trail have warmed up to health care in recent months, touting the benefits of their mammoth 2010 law. While trumpeting popular provisions such as coverage for preexisting medical conditions, Democrats are also linking the Affordable Care Act to a recent slowdown in the rise of health care costs.

Former President Clinton delved into the subject at his convention speech in Charlotte, N.C., suggesting that President Obama’s health care law produced the slower-than-average growth in health care spending in 2010 and 2011.

“Health care spending has been under 4 percent in both years, for the first time in 50 years,” Clinton said.

Health care spending increased by just 3.9 percent in 2010 and 3.8 percent in 2009. And within Medicare, the spending slowdown has been even more dramatic: Instead of the program’s average 6 percent annual increase per beneficiary in recent years, 2010’s rate was 0.2 percent. In 2011, it was 2.8 percent. This benefits household budgets but also the government’s coffers since the longer-term costs of Medicare and other health entitlements pose huge fiscal challenges for the nation.

But economists on both sides of the political spectrum say that a variety of forces are at work in the more restrained increases in health care spending. One factor is a weak economy, which means Americans might opt to postpone elective procedures like cataract or knee surgery to avoid out-of-pocket costs that aren’t covered by insurance. Or they might skimp on costs like prescription drugs. When fewer people visit the doctor or when people cut back on prescription-drug purchases, insurance companies see lower costs and that can eventually translate into cheaper premiums for consumers.

The Kaiser Family Foundation found that the average family premium for employer-sponsored health insurance rose to nearly $16,000 a year, about a 4 percent increase from last year. The numbers might give many Americans sticker shock, but it was a smaller rise than expected. KFF President Drew Altman said that it’s too soon to tell what the cause is, exactly.

David Cutler, a Harvard economist and frequent adviser to the Obama campaign, told the New York Times this week that the Affordable Care Act’s efforts to control costs were contributing to the slowdown.

“The slow economy is only part of it,” he told The Times.

The good numbers are fodder for Democrats on the campaign trail to argue that Obama’s health care law did, in fact, slow down health care costs. The law primarily saves money by slashing $716 billion from Medicare payment rates to hospitals and private Medicare plans. Those cuts just went into effect this year, and at least on the hospital side, they are contributing to the slower-than-expected growth in Medicare spending in 2012. But those cuts were largely put in place to offset the cost of helping an additional 30 million people get insurance coverage, not to stem the rising cost of health care.

There are also several pilot programs in the Affordable Care Act that reward hospitals and doctors with federal funding if they successfully save money by using new delivery methods, most of which emphasize greater coordination between health care providers. Many of those programs just started in the past year and haven’t been operating long enough to see savings.

As far as consumers’ pocketbooks are concerned, the law also included a new rule for insurance companies that limits how much they can spend from premiums on things like advertising and salaries. That went into effect in 2011, and consumers started seeing the dividends of that rule last month: the Obama administration reports that insurance companies paid back more than $1 billion to American consumers this year.

Gail Wilensky, a former top health official in the George H.W. Bush administration, said she hoped it was true that the health care law was contributing to a lasting trend of lower health care inflation. But Wilensky said in an interview, “Whatever is going on, it’s very hard to attribute it to anything in the ACA. It was starting before that.”

Wilensky said that though the slowdown in health spending outpaces the decline in incomes tied to the recession, that calculation does not include other losses in wealth that impact how much people spend on health care.

“It was not just job loss, but in a way that has been unusual, it was wealth loss, as reflected by the decline of the stock market and, for many people, the decline in their home values. That is such a big, big part of middle-class American’s wealth position, and we underestimate if we only look at income loss,” Wilensky said.

She also pointed to a slowdown in spending that occurred in the 1990s as health-maintenance organizations restricted health services. Eventually that spending slowdown was reversed as doctors, hospitals, and patients pushed back against insurance-company restrictions.

Robert Berenson, a fellow at the liberal-leaning Urban Institute, said that the talk of health care reform in general, and not the specific policies of the Affordable Care Act in particular, could potentially be credited with the spending slowdown.

“I do think it’s more of an environmental phenomenon that the world is going to change,” Berenson said in an interview. “I think something real is going on related to all the proposals for new payment models, and physicians and others are getting the message.”

In other words, the health care industry has seen the writing on the wall: They will no longer get paid for every single test and procedure they do.

Berenson, who spent 20 years practicing as an internist, said it might be that doctors are tired of getting criticized for not paying attention to costs.

“I suspect physicians are tired being criticized for not being able to restrain themselves,” Berenson said. “It’s more health reform in general, rather than specific provisions that are associated with ACA.”

Joel Wittman is an Adjunct Associate Professor at the Wagner School of Public Service of New York University.  He is the proprietor of both Health Care Mergers and Acquisitions and The Wittman Group, two organizations that provide management advisory services to companies in the post-acute health care industry. He can be reached at joel.wittman@verizon.net.