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Decomposing US Health Care Spending

By November 14, 2013Commentary

Every now and then there is an article or study that really is worth reading in detail and going over several times.  Several authors have compiled a view of health care and health care trends for an article in the Journal of the American Medical Association.  (JAMA Article)   While you may not agree with all of their analysis or perspectives, they have presented important data and identified critical issues for health care public policy.  They begin with 1980 and examine a wide variety of data and qualitative developments.  It is widely appreciated that US health spending in 2011 was $2.7 trillion, about 18% of GDP; that about 15.7% of the workforce is employed in health care and that, while the rate of growth has slowed in recent years, spending has grown at a clip in excess, often well in excess, of either inflation or GDP.  One very relevant fact which the authors highlight is that since 2000, over 80% of spending increases are attributable to unit price increases, particularly at hospitals, for drugs and devices and for physician services.  Utilization and an aging population are not significant factors in spending growth.  This should inform the actions we take to try to limit spending increases by focusing on how to reduce those unit costs.  Chronic illnesses account for the vast majority of spending, both in elderly, but also in the rest of the population.  This would suggest that the emphasis on wellness could impact future costs.

Another interesting highlighted piece of data is that over the 1980 to 2011 time period, the share of spending accounted for by governments rose from 31.1% to 42.3% while out-of-pocket spending declined from 23% of total spending to 11%.  These two trends are linked, as government programs tend to require lower out-of-pocket spending, but over the entire period, people in commercial, largely employer-sponsored health plans also saw declines in out-of-pocket spending, although in the very recent period, many commercial health plan members are seeing greater out-of-pocket costs and they have born a disproportionate share of premium increases, along with reductions in wage growth that would otherwise occur if premiums weren’t so high.  The authors again note the often quoted fact that although compared to other countries the US spends far more on health care, our health quality and status is often worse.  One particularly ominous trend cited by the researchers is the rate of consolidation among hospitals and other providers and payers; a trend which is highly unlikely to lead to lower unit prices or spending growth.  The researchers also note that although there has been immense spending on health information technology, it is unclear that value is being received for that spending.

One strong source of tension in health care identified by the authors is between patient expectations for individual care, physician and other provider desires for autonomy, and payor and regulatory pressures which define value by aggregated measures of cost and value.  While these are clearly potentially conflicting drivers, two other sources of conflict which will become more prominent, particularly in regard to cost, are the reluctance of the healthy subsegment of the population to by taxes or premiums subsidize the behavior and health care needs of the unhealthy subsegment; and in regard to the practice of medicine, the availability of more and more diagnostics and treatments driven by individual patient genomics and downstream biochemistry, most of which are very, very expensive versus the notion of guideline-driven population health stratification and management, which often does not incorporate the notion of individualized biochemistry.  The turmoil over the implementation of the current “reform” law has begun to highlight the first source of conflict; as that is resolved one way or another, an increasing cost trend driven by individualized treatments will likely become a new source of friction between patients, providers and payers.

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