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What Is Up With US Health Spending?

By January 3, 2014Commentary

In 2012 real, inflation adjusted, per capita health spending growth was less than 1%, about the same as real per capita GDP growth, and in contrast to the long-run average of health spending increasing annually at a rate 2.3% faster than GDP since 1960.  An article in the New England Journal of Medicine explores the likely explanations for the slowdown in growth and whether it might persist.   (NEJM Article)   The authors first review the history of health spending growth, beginning in the 1960s, when the passage of Medicare and Medicaid kicked off the era of above GDP increases, as well as the various government and private sector attempts to restrain health spending.  While health spending and GDP have generally tracked closely, so that the recent recession could be the substantial cause for the slowdown in health spending, the below GDP growth rate for the last two or three years may have other causes.  Overall, health spending rises because of general inflation in labor, energy, supplies and other input costs.  Another significant contributor has been new technology, which is often estimated to account for half of all spending growth.  Rising prices, particularly for the private sector payers, are another possible factor, as are changes in population health status, such as increased obesity and aging.

Spending may have slowed because of changes in some of these factors.  For example, the introduction of new technology appears to have slowed in the last few years–there are not as many new blockbuster drugs; and the growth in use of some expensive technologies such as imaging has also declined as more intensive management has been introduced by payers.  Higher cost-sharing by patients has likely reduced demand for some services and more providers are under forms of payment that encourage cautious use of medical resources.  Unit price growth seems to have moderated and there may even be gains from a flattening of obesity rates and other wellness initiatives.  If the economy grows faster and health spending remains constrained, it will likely be due to some of these factors.  The article concludes by properly noting that even if the slower growth rate continues, health spending can be viewed as too high and all possible steps should be taken to rein it in.  These steps, in the authors’ view, include continuing payment reforms, continued efforts to improve care coordination, particularly for the sickest patients, more consumer engagement and better information for consumers and providers, and administrative reforms to reduce billing and payment costs.  While this all makes some sense, some of these initiatives may provide spurs for more cost-growth.  For example, more provider consolidation and payment reforms may actually lead to pressures for higher annual reimbursement increases.  And the impact of the health reform law on spending is still uncertain.  Health spending will be watched carefully over the next couple of years and everyone should be very happy if it began to grow at a rate below GDP growth.

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