Another Slow Year for Health Care Cost Growth - Will It Last?

With health care spending a central topic in budget discussions, the actuaries at the Centers for Medicare and Medicaid Services (CMS) have released a timely report on the growth of National Health Expenditures (NHE). In the report, published in Health Affairs, CMS finds that total health care spending (both private and public spending) in the U.S. in 2011 reached $2.7 trillion, or about 17.9 percent of GDP. This comes out to roughly $8,700 per person.

Compared to the prior year, this is an increase of 3.9 percent and the third year in a row that health care cost growth has not increased above this level. This increase is also in line with the growth of GDP -- about 4 percent in 2011 -- meaning that the NHE as a share of GDP has remained the same. While lawmakers debate rising health care costs, this report would appear to suggest health care costs are actually slowing relative to the previous decades which averaged increases of 7.8 percent per year. But will this slowdown last?

Last summer, we discussed this question when the actuaries released their projections for the next decade on health care cost growth. At that time, they projected health care cost growth would increase on average 5.7 percent annually from 2011-2021, but only about 0.9 percentage points faster than GDP. For context, the Independent Payment Advisory Board's target growth rate for Medicare spending is GDP plus 1 percent, and health care spending growth has often well exceeded this target in the past. This week’s report sheds more light on some of the reasons for this slower growth, and provides some more clues as to whether this trend is a temporary consequence o the recession or whether it will continue over the long term.

While the recession ended in June 2009, its effect persisted into 2011 with continued levels of high unemployment, and therefore a decline in health insurance coverage. The CMS actuaries point out this is typical of economic downturns, although was more pronounced than prior economic cycles. The impact on insurance coverage was one of the biggest contributors to the slower growth in NHE. When people lack coverage they tend to seek less medical care, resulting in a reduction in use and intensity of services. Together with a decline in the amount and mix of investment in structures and equipment, this decrease has been a major factor in slower health care cost growth. As the economy recovers and unemployment trends downward, it is unclear how much longer this will continue to affect the growth rate.

Some have pointed to the Affordable Care Act as a source of slower growth, potentially even having a longer term effect. However, the actuaries find that the ACA’s influence on NHE was minimal and had no discernible impact in 2011. Other factors in the CMS report include slower growth in the use of hospital services and physician and clinical services in the volume of prescription drugs dispensed. What remains uncertain is how new cost containment pilots will have an impact and how providers will respond to them. Richard Foster, Chief Actuary for CMS, remains optimistic:

The jury is still out whether all the innovations we’re testing will have much impact…I am optimistic. There’s a lot of potential. More and more health care providers understand that the future cannot be like the past, in which health spending almost always grew faster than the gross domestic product.

This is not the first time we’ve seen this kind of slowdown in health care cost growth. Most recently in the 1990s, the expansion of managed care and Health Maintenance Organizations (HMOs) along with Medicare provider cuts slowed the average annual growth of NHE slightly. However, this was short-lived as the backlash against managed care produced a reversal in this pattern in the latter part of the decade.

^{Source: Centers for Medicare and Medicaid Services}

The 2011 growth rate is a sign of an encouraging trend, but history shows us that trends can easily reverse in the years ahead. Over the next two decades, CBO forecasts that the overall aging of the population will account for the majority of the growth in major health programs, but thereafter health care cost growth will become the lead driver of federal health care spending. Already, despite slower growth for other payers, the federal government’s share of NHE has increased to 28 percent of total health spending compared to 23 percent in 2007.

If the current NHE trend continues to slow, this may improve projections for federal health expenditures, but the experience of the 1990s teaches us we cannot take it for granted. Lawmakers should not use the current trend as a reason for complacence. Long-term reforms to federal health programs and health care spending more broadly will be needed to not only bring down future deficits, but to ensure the sustainability of these programs for generations to come.