[This post is based on Chapter 5 of the Council of Economic Advisers new Economic Report of the President.]
The fact shown in the first chart below—a decline in the rate of health spending per person—is becoming pretty widely known. What’s not known is whether this trend will stick. As I suggest below, based on the new ERP chapter, I think at least some of it will, and if it does, it signals one of the more important economic developments of our time, with far reaching implications for fiscal policy (and for jobs and growth too, but I’ll speak to that in a different post).
Source: ERP, link above.
Figure 1 shows that while costs jump around a good bit, health spending both overall and on Medicare has slowed over the past few years. But figure 2 is actually a bit more revealing. Typically, looking at cost trends means simply plotting them as in the first figure. But since a) health care spending has been growing faster than most everything else, and b) it’s such a large share of our economy (around 17%) it’s important to compare its growth to that of GDP per capita. When health grows faster than GDP, its share of GDP rises, and it squeezes out other things we want and need.
Figure 2 provides that comparison and shows that the gap has gone from 2.2%, 2005-09 to zero over the past few years. That’s impressive and important, but hold the “woo-hoo’s!” because as you can see, we’ve been there before, only to go “whoops” shortly thereafter. Is this time different?
That’s the big question, and there are arguments on both sides. One of the first things to recognize is that the most recent slowdown occurred during big-time recessionary years; surely, that played a role. True, but not for Medicare, since demand for those services tends not to be very cyclical at all.
Also, the ERP points out that if you look at the relationship between state changes in unemployment and health spending, you can back out an elasticity (a one percentage point increases in the unemployment rate correlates with a $46 decline in per-capita health spending; oh, and like I said, for Medicare, the correlation is flat and insignificant). Apply that elasticity to the national numbers and the increase in unemployment only explains about a fifth of the decline in health spending.
But that’s a rough gauge that I wouldn’t push too far. Remember the woo-hoo/whoops event shown above.
In fact, the difference between that mid-90s episode of spending slowdown and this one also points more toward structural (i.e., they’ll stick) than cyclical explanations. The mid-90s decline in the rate of growth was very much a function of a one-time shift by insurers from fee-for-service to HMOs and PPOs. So the costs fell hard but since the actual prices and practices of medical procedures and hospitalization weren’t altered, costs quickly got back on their former slope. It was an “intercept shift” not a change in the rate of growth.
But this time, the changes may be more lasting, because they are targeted at squeezing inefficiencies out of the delivery system, like inadequate coordination, over-testing and over-treatment, or inattention to preventive care. The ERP chapter notes the following advances in these areas:
–Reduced hospital readmissions: programs associated with the Affordable Care Act have been working to improve transitions out of hospitals and the results look promising (see next figure).
Source: ERP, link above.
Data provided by the Centers for Medicare and Medicaid Services (CMS) show that since the Partnership for Patients program was introduced in 2011, the hospital readmission rate within Medicare has fallen to 17.8 percent, down from an average of about 19 percent that had prevailed from 2007 through 2010 (CMS 2013).
–Better use of health IT to share information, coordinate care, avoid duplication as well as costly and harmful mistakes.
–Improving anti-fraud efforts re government health care, which the ERP reports “recovered a record-high $14.9 billion over the last four years.”
–Reform payment systems to dis-incentivize over-utilization, an inherent problem in fee-for-service plans like Medicare.
–E.G., Bundled payments: “A bundled payment is a fixed payment for a comprehensive set of hospital and/or post-acute services, including services associated with readmissions. Moving from individual payments for different services to a bundled payment for a set of services across providers and care settings encourages integration and coordination of care that will raise care quality and reduce readmissions.”
–Accountable Care Organizations: “contractual organizations of primary care physicians, nurses, and specialists responsible for providing care” to large numbers of patients. When the ACOs generate savings relative to past practices, the Feds share some of those savings with the members of the ACO.
Along with greater coverage of low-income folks through the Medicaid expansion, these initiatives are what “Obamacare” is about. They’re wonky, technical fixes and incentives designed to squeeze the fat out of a system that is uniquely wasteful compared to those in other advanced economies. That’s a lot less sexy than death panels and socialist command-and-control fantasies, but there it is…
My colleague Paul Van de Water recently noted that CBO’s 10-year forecasts for the growth of Medicare and Medicaid have come down by $500 billion relative to those from a few years ago. We don’t yet know whether any of this will last—whether we’re looking at another “whoops” moment. But because the initiatives ticked off above are targeted at changing highly inefficient incentives embedded in the delivery system, using technology to improve productivity (which typically lowers costs), and providing better oversight, they certainly have the potential to be lasting. And remember, while the recession is surely playing some role in recent cost savings, that role is surely less pronounced in Medicare and hospital readmissions.
So my guess is there’s something lasting going on here, and that means the doctor has just prescribed a very large chill pill for those who want to whack away at Medicare and Medicaid and CHIP because “they’re going bankrupt…bankrupt I tell you!” They’re not, and our energies would be much better spent on careful research on the factors behind these recent cost trends and how we can build on them. The goal is not to diminish these extremely valuable programs. It’s to ehhance their efficiency so as to ensure that they remain a solid part of American social policy.