Opinion: The cost curve on health care – it’s bending

Opinion: The cost curve on health care  its bending

By Bob Semro

The biggest long-term concern with the American health care system is cost. The affordability of premiums, access to care and the impact of Medicare and Medicaid on state and federal budgets are all linked to the ever-rising costs of health care. Unless we bend the cost curve, the nations health care system will become increasingly unsustainable.

The good news is that, even though costs and spending continue to increase, we have started to see a slowdown.

Over the years, the news on this front has been consistently bad. For 31 of the last 40 years, health care has grown significantly faster than the U.S. economy. Between 1960 and 2012, costs more than tripled, from 5.2 percent of gross domestic product to 17.9 percent. That means almost 18 cents of every dollar is spent on health care.

To put these increases in perspective, if the cost of commodities had gone up at the same rate as health care since 1945, a dozen eggs would cost $55, a gallon of milk would be $40 and a dozen oranges would cost $134, according to the Institute of Medicine.

Increases in insurance premiums are where many Americans see the impact of higher health care costs. According to the Kaiser Family Foundation, total employer-based insurance premiums increased by 172 percent between 1999 and 2012. The average annual premium for single-person coverage increased from $2,196 in 1999 to $5,049 in 2012; the average cost of family coverage increased from $5,791 to $13,770.

Now for the encouraging news: Health care spending has been dropping since the beginning of the recession. Medical inflation has slowed from an unsustainable 11 percent in 1990 to 3.9 percent in 2011.

Many analysts attribute this to the effects of the economic downturn. However, two recent studies one by PricewaterhouseCoopers (PwC) and one by the Federation of American Hospitals (FAH) suggest that the decline in spending may not be exclusively related to the effects of the Great Recession.

The PwC study, Medical Cost Trend: Behind the Numbers 2014, finds that the medical cost trend in 2014 will dip even lower than in 2013. PwCs Health Research Institute projects a medical cost trend of 6.5 percent and a net growth rate of 4.5 percent in 2014.* The economic slowdown is a factor, but the study also cites aggressive and creative steps by employers, new venues and models for delivering care, and elements of the Affordable Care Act. PwC also suggests that these factors are expected to exert continued downward pressure on the health care sector.

PwC cites four factors that have reduced the medical cost trend:

  • Health care treatment is moving toward less expensive care settings, such as retail clinics and mobile providers and away from more costly venues such as hospitals. Treatment is more convenient for consumers, and health care bills can be 33 percent lower in these settings.
  • Some major employers are contracting directly with large health systems that offer greater savings for more costly and complicated procedures.
  • The new unnecessary re-admission penalties in the Affordable Care Act are reducing health system waste. Hospital re-admissions dropped by 70,000 in 2012 and are expected to fall even further in 2014.
  • More employers are offering high-deductible health plans to reduce the overuse of health care. Consumers make more cost-effective choices when they are aware of the real cost of treatment and procedures.

On the flip side, PwC predicts that some prices will increase because of the rise in expensive complex biologic drugs and because of health industry consolidation, which has increased by more than 50 percent since 2009. As a result of hospital mergers, prices can increase by as much as 20 percent, especially in those areas where one hospital becomes the major player in a market.

The Federation of American Hospitals also sees downward pressure on health care costs. Its study, Structural Changes Drive Health Care Spending Slowdown, cites several factors, including improved care coordination, more appropriate use of services, growth in community-based care, better targeting of technology, stronger primary-care systems and implementation of new care-delivery systems. The study also cites other factors authorized by the Affordable Care Act, including the Medicare Shared Savings Program, value-based purchasing programs, payment and continuity of care reforms and state-based health insurance exchanges.

Medicare has a great deal of influence on health care spending. Prior to the ACA, Medicare was projected to become insolvent in 2016, according to the Medicare trustees board. With the ACA in place, that projection has been extended by 10 years. Additionally, annual Medicare spending rose just 1.7 percent per beneficiary from 2010 through 2012, compared to 6 percent per year in the previous two decades.

According to the FAH, the outlook for Medicare might be even brighter:

Medicare spending per beneficiary grew at an average rate of 1 percent below GDP per capita from 2010 through 2012 (compared to an average rate of more than 3 percent above GDP per capita from 1970 through 2010). If spending per beneficiary continues to grow at that average rate, the cumulative federal deficit could be reduced by 16 percent, or $1 trillion, by the year 2023.

Also, the annual rate of growth in hospital spending from 2009 to 2013 fell from 6.4 percent to 4.1 percent.

The long term-effects of the ACA are projected to significantly reduce Medicare spending. Structural changes promoted by the ACA should reduce Medicare spending by 32 percent in 2050 and 43 percent in 2080, compared to Medicare spending without the ACA.

It is unclear whether the slowdown in health care spending will continue. Different studies place less emphasis on structural changes in the health care system and greater importance on the slow recovery from the recession. However, the causes of this downward pressure on the cost curve are complicated and interrelated, and the actions described by PricewaterhouseCoopers and the Federation of American Hospitals directly address core issues and systems.

One thing that is certain is that the public analysis and debate that accompanied the passage and implementation of the ACA have led to a far-reaching reappraisal of our health care system. They have promoted or inspired many new efforts to improve quality and efficiency in ways that may help to reduce costs.

Not all of these efforts were introduced by the Affordable Care Act. But there is little doubt that the national focus on health care reform has helped the federal government, the health care industry and American businesses focus on finally addressing our financially unsustainable health care system.

(* Note: Medical cost trend is the projected percentage increase in the cost of medical services. The net growth rate factors in changes in the types and amount of health care services consumed. As the price of medical services increases, consumers use less or buy less expensive services. As a result, the overall increase in spending is projected to grow at a net rate of 4.5 percent, while the costs of medical services are projected to increase by 6.5 percent.)

Bob Semro is a health care policy analyst with the Bell Policy Center, a non-partisan policy research center that advocates public policies that reflect progressive values.

Opinions communicated in Solutions represent the view of individual authors, and may not reflect the position of the University of Colorado Denver or the University of Colorado system.