The Blurry Future of Health-Care Spending

The nation has been seeing a slowing in the rise of health-care costs. Whether the fiscal pressures on governments will ease remains to be seen.
by | April 2, 2014

Total U.S. health-care spending rose just 3.7 percent in 2012, decreasing as a share of the economy for the second consecutive year. In fact, health-care costs grew more slowly each year from 2009 to 2012 than in any other year since the Centers for Medicare & Medicaid Services (CMS) began collecting the data in 1960. The news was welcomed, because for years soaring health-care expenditures had far exceeded U.S. economic growth.

But as Pew's State Health-care Spending Project found in a recent analysis, the national health-care spending story in 2011 and 2012 was very different from the experience of state and local governments, where spending increased twice as fast, principally because a temporary surge in federal Medicaid funding delivered through the American Recovery and Reinvestment Act stopped flowing. As state and local governments continue to navigate the aftermath of the Great Recession, health-care spending remains a source of fiscal pressure.

With the health-care landscape continuing to change, it is also important to dig below aggregate, overarching trends to better understand the effects on various health-care payers, whether governments, employers, employees or consumers. For instance, the benefits of stabilizing costs may not be felt by some families, at least in the short term, if they are bearing a greater portion of their health-care bills due to shifts in cost sharing from employers to employees in the form of higher annual deductibles and copayments.

It is also important to understand what, exactly, has been applying the brakes to runaway health-care spending. There are competing (although potentially overlapping) explanations, and which of them is correct matters a great deal. CMS noted that the recent stabilization of health-care spending follows a pattern similar to the two or three years after previous recessions. And an April 2013 Kaiser Family Foundation study attributed most of the slowdown to economic factors beyond the health system and predicted a return to more-rapid growth as the economy strengthens. If this explanation is correct, national health-care spending can be expected to resume its long-term, rapid rise.

But several additional factors could be at work, according to many other observers. Medicare is usually insulated from short-term economic swings because most of its enrollees are retired. Yet even this program saw its costs rise more slowly than in previous years. Experts cite additional contributing factors, such as more cost-conscious provider care patterns and less-rapid development, overall, of expensive medical advancements. In addition, greater public attention and the availability of more "actionable" information regarding price and quality differences among providers may have encouraged some individuals to seek better value when they required care. But unknowns remain about how the federal Affordable Care Act and the many health-care delivery reforms it finances have, and will, affect health-care expenses.

The implications of this debate are significant. If the deceleration has indeed been mostly temporary, then the fiscal challenge long posed by health-cost growth may soon resume. On the other hand, if the change is more durable, the benefits of a health-care spending slowdown could be helpful overall, but may also have a negative impact on some parts of the economy.

The health-care sector has long been a leading driver of employment growth, expanding even when virtually every other industry was contracting. These jobs frequently lead to secure, well-paying careers that most states and localities would welcome. A change in this trend, which may already have begun, could add pain to an already sluggish recovery.

However events develop, the national trends are likely to differ in how they play out from state to state. State policy leaders will need to closely follow the many elements of the still-unfolding story and track the various factors that can cause health costs to rise, such as the price of new medical technologies and the incidence of chronic illnesses and obesity. Tracking state-level statistics and trends will be particularly important, because the experiences of states may vary from the national experience -- and even from each other.


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