What’s Causing Health Care Spending to Slow?

Those of us in the health care industry (both delivery and financing) are pleasantly surprised, albeit cautiously optimistic, to learn that health care spending has slowed rather dramatically in recent years.  In fact, for the first time ever, the percentage of our Gross Domestic Product (GDP) attributable to health care has decreased from 17.3% in 2011 to 17.2% in 2012 ($2.8 trillion).  Fellow health care stakeholders may find it interesting that in1960; health care consumed a mere 5% of our nation’s GDP.  Put another way, in 2012 health care spending grew by 3.7%, which is virtually identical to the spending percentage growth in 2009, 2010, and 2011.  By contrast, in 2002, health care spending grew by a whopping 9.7%.
So while this is great news for the nation, it begs a couple of questions: 1. What is/are the cause(s) of the decline in health care spending; and 2. Is the trend temporary or sustainable?  Let’s examine some of the contributing factors associated with the recent trend.  One thing is certain, and in fact irrefutable – the slowdown in health care spending is NOT attributable to any ONE single factor.
The Recent Recession – History has shown, and the Centers for Medicare and Medicaid Services (CMS) has reported, that health care spending declines tend to follow an economic slump, such as the one we went through beginning in 2007/2008.  There are a number of reasons why this connection exists including reduced wages and prices; patients deferring care; and patients losing their health insurance and thus, their ability to use and pay for care. (Note: a recent CMS report indicated that between 2007 – 2012, 9.4 million people lost their private insurance.)
Prescription Drug “Patent Cliff” – Starting in 2011, culminating in 2020, 47 brand name drugs will lose their patent protection.  Between 2007-2012, it is estimated that the pharmaceutical industry will experience a loss of $60 billion in sales resulting from new generic competition, with billions more in losses on the near horizon.  Drug spending rose just 0.4% in 2012, down from 2.5% in 2011.  And pharma isn’t the only health care category to experience price declines.  The costs of heart bypass and mastectomy have both declined in recent years.
Higher Out of Pocket Costs – From 2006 – 2013, average deductibles rose from $600 to approximately $1,100 on private health insurance plans (source: economists Abitabh Chandra and Jonathan Holmes of Harvard and Jonathan Skinner of Dartmouth).  The growth in popularity and installation of so called “consumer driven health plans” has contributed to this trend, along with employers desperately seeking to manage their bloated health insurance costs by merely shifting costs to employees.  But the ACA could result in a seismic increase in insured employee out of pocket costs, if my ACA compliant individual health plan offering for 2014 is any indication. (Note: my insurer increased my out of pocket maximum from $5,000 to $12,700 in the process of making my plan “ACA compliant” for 2014.)
The Affordable Care Act (ACA) – There is no question the health care reform law had an effect on health care costs (despite CMS concluding that “the ACA had a minimal impact”). But readers might be surprised to learn which particular aspect of the ACA had the greatest impact on the slowdown of health care costs – Medicare cuts.  The ACA took a huge ax to Medicare reimbursements, to the tune of over a half a billion dollars.  And while these cuts affected the single largest consumer of health care (i.e., Medicare accounts for over 1/5 of all the money spent on personal health care), there’s also very compelling data that suggests that Medicare cuts translate to private sector health insurance reductions.  Health care researcher Chapin White found that a 10 percent reduction in Medicare pricing yielded a 3 or 8 percent reduction in private insurance prices, depending on the statistical method used.  These results were published in Health Affairs. It’s no secret to those of us in the health care industry, that Medicare reimbursement rates affect (if not drive) private health insurance reimbursement levels.

There are a number of additional factors that have contributed to the slow down in rising health care costs.  I would submit that a number of other ACA related provisions, whether intentionally or otherwise, have caused insurance premiums to stabilize.  Specifically, I would point to the Minimum Loss Ratio (MLR) provision, and the massive insurance company subsidies embedded in the ACA as two key provisions that have “altered” health insurance companies’ 2014 and 2015 price setting strategies.  Next week’s blog post will address the aforementioned subsidies, which may surprise some of you.