Why the drop in US healthcare spending?

Between 1980 and 2009, healthcare expenditures grew by 7.4 percent, which most economists agree would bankrupt the nation if continued. But a closer look at the statistics reveals that the last 10 years in that period saw only a 5.9 percent increase, and the spending growth from 2009 to 2011 dropped to 3.1 percent, according to a recent report in Health Affairs.

The three questions on everyone’s mind are: (1) what’s responsible for the slowdown?; (2) will it continue?; and (3) what are its implications?

Alexander J. Ryu, and his associates at Harvard Medical School believe two factors may be partially responsible for the recent decline: job loss and changes in health insurance policies, both of which have put a heavier burden on the public, requiring them to pay a larger portion of their medical expenses. Naturally one would expect total health spending to slow down if patients have higher out of pocket costs.

In the Health Affairs report, Ryu and associates analyzed insurance data on more than 10 million enrollees who were covered by large companies between 2007 and 2011. Their analysis revealed that out-of-pocket costs did in fact go up during that period. According to their calculations, these changes account for about a fifth of the recent decrease in US healthcare spending.

They also found that when changes in insurance benefits were factored out of the equation, the drop in US spending persisted, suggesting other factors were at play. The authors believe “a reduction in the rate of introduction of new technology was also at work.”

The Health Affairs paper concludes: “Given the evidence from our analyses, we believe that current trends support cautious optimism that the spending slowdown may persist.”

Not everyone agrees with that assessment. During a recent interview, Paul Keckley, executive director of the Deloitte Center for Health Solutions, said, “three years in a row of 4 percent or less doth not a long-term trend make.” Consumer surveys have found that patients have put off about 20 percent of elective procedures, Keckley acknowledges, and that may suggest changes in health insurance design are partially responsible for putting the brakes on healthcare spending.

But more revealing is the fact that the GDP was down about 1.5 percent so “even though the health spend slowed to 4 percent, it stayed on a 35-year trend line that’s 2.5 percent above the GDP…So health spending exceeded the overall growth of the economy by another 2.5 percent a year.”

Patrick Riley, a senior healthcare industry analyst at Frost & Sullivan, does believe that the drop in US healthcare spending represents a trend. While he didn’t address its relationship to the nation’s GDP in a recent interview, he does offer evidence that both hospitals and the public are tightening their belts.

Economists estimate that about 37 percent of the slowdown in health spending between 2007 and 2011 resulted from the recession itself, says Riley. But there are several other forces at play here, he says. Riley echoed the Health Affairs report, saying that increased out-of-pocket costs for consumers are driving some of the decreased healthcare spending.

The other major factor, says Riley, has been the introduction of the Affordable Care Act and its mandates. CMS and HHS are reducing payments to hospitals, imposing penalties in 2013, for example, if they allow avoidable readmissions for acute myocardial infarction, pneumonia, and congestive health failure to exceed specified levels. “Those categories will be expanded by 2015 to include chronic obstructive pulmonary disease and stroke…that means every hospital administrator is working to get operating costs down.”

Mark E. Lutes, an attorney with EpsteinBeckerGreen who specializes in healthcare and life sciences law, agrees that the shift in insurance benefits design is contributing to lower healthcare spending as patients are forced to pay a larger portion on their bill, which in turn is causing them to cut back on doctor visits.

The downside, however, according to Lutes, is that eventually this means patients will be much sicker when they finally do seek medical services. That’s going to squeeze healthcare practitioners from two directions. They’ll being required to provide more complex and expensive care, while at the same time the government is shifting to value-based purchasing and expecting them to offer better quality and less expensive care.

Photo used with permission from Shuttershock.com.