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Will the Recent Slowdown in Health Costs Persist

By December 12, 2013Commentary

For several years, growth in per capita health care spending has shown a declining trend.  The Administration has been quick to credit the reform law but new research published by the National Bureau of Economics Research finds that that law deserves little credit and suggests that the reduced trend won’t last.   (NBER Paper)    The authors initially examine the causes for the slowdown and very helpfully examine that by payment type:  Medicare, Medicaid and private health insurance.  Spending growth is a product of unit price changes and utilization changes.  Without spending too much time on the very important data and analytic details, Medicare showed less of a slowdown in spending, as beneficiaries are largely insulated from extensive cost-sharing in that program, and what decline there was is probably due to price controls as well a reduced effect of new technology.  Medicaid showed a very flat rate of real growth for several years largely because the states have reduced reimbursement and tightened benefits.  Private insurance experienced continued price growth, but reduced demand and utilization, largely due to increased cost-sharing through high-deductible plans.  Overall the authors believe that less new technology, the spread of high-deductible insurance and the cessation of trend growth for Medicaid were responsible for the portion of the reduced per capita growth rate not explained by the recession and lower GDP growth.  In terms of the future, they believe the trend will re-accelerate.  New technology investment, as measured by investments and patents, among other factors, is growing.  This new technology tends to be expensive and to spread rapidly.  One area where this certainly is true is specialty drugs, which form most of the new pharmaceutical pipeline, and which will overwhelm the decline in drug trend caused by the conversions to generic utilization over the last few years.  The growth in private high-deductible plans will level off and that effect will no longer influence trend.  And it is unlikely that Medicaid can indefinitely have low reimbursements without affecting patient access to care.  And one possible cause of future spending growth not addressed in the report is increasing frustration with income levels by physicians and other providers, creating a pent-up demand for higher prices that historically, one way or the other, has always been satisfied.  The authors conclude that health spending growth will be around 1.2% to 2% over real GDP growth, which would lead to health spending being a much greater percent of GDP in the next couple of decades.  This is not a good or even sustainable occurrence, but I believe the growth rate will be even higher without real “reform” to the way we pay for health care and how we react to people’s health behaviors.  This is a tremendously useful report with an extremely informative analysis.

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