Are Health Costs Really Slowing? And What Does it Mean If They Are?

March 19th, 2013 at 1:12 pm

[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.


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6 comments in reply to "Are Health Costs Really Slowing? And What Does it Mean If They Are?"

  1. Flex says:

    Is it possible that the reason the ’95-’99 health care growth in relation to GDP is more a factor of the over-heated economy of the time?

    In other words, it isn’t that we managed to contain health care cost growth during this period, but that the yardstick we used to measure it by was larger.

  2. Perplexed says:

    Or perhaps private insurers are leveraging off the public sector success in controlling the price gouging of the medical industrial complex as so well articulate by Seven Brill’s recent time article:,9171,2136864,00.html (which recently won an award from the Sidney Hillman Foundation and “appears to be on course to become its best-selling cover in nearly two years” according this NYT blogpost:

    Just wondering, was the tax subsidy provided to these so called “non-profit” corporations included in your “tax expenditures” posts and graphs?

    • Jared Bernstein says:


      • Perplexed says:

        Just making sure. Ok, to sum it up then we have:
        1. Government supplied tax expenditures
        2. Government supplied protections through drug monopolies
        3. Government supplied protections through medical equipment monopolies
        4. Government supplied restrictions on negotiating prescription drug prices
        5. Government funded basic research
        6. Govenment enforced restrictions on medical school access
        7. Government enforced restrictions on “imports” of medical practitioners
        8. Government enforced restrictions on insurance competition
        9. Health care costs that are double what they are in other wealthy countries
        10. 17+% of our economy tied up in this grand enterprise!

        “Private sector” capitalism at its finest! And now we need to cut back on social security, medicare, medicaid, education, and forgo infrastructure improvements so we can continue to pay for the projected increases.

        Did I miss anything else?

        And then we wonder why the TBTF banks and Berny Madoffs are able to pull off their frauds so easily?

  3. Fred Donaldson says:

    Medicare has its own rates for services charged by doctors, test and hospitals, and these are amazingly lower than what private health insurance allows. The economics of an insurance company is a percentage of profit on premiums paid, and premiums are determined by costs. The more healthcare costs, the higher private insurance premiums, and the more than 15% or 20% means in real dollars.

    It is in the self interest of health insurance firms to pay high expenses, in order to make more cash. They can talk about prevention, but they make their money on higher payouts and then higher premiums that result, and a resulting higher amount based on a steady percentage is paid to them.

    Medicare, on the other hand, adopts a frugal approach and sometimes pays less than half of what is billed, but almost always less. Take it from someone on Medicare, who checks the bills and payments, and who suffered a $120,000 stay in the hospital and has a heart specialist: Medicare for all is the solution.

  4. Rob Lewis says:

    Aarggh. It is endlessly frustrating to watch commentators of all political stripes persist in treating health care costs as though they are some kind of irresistible force of nature, which can be monitored and graphed and fretted about, but about which nothing can ultimately be done.

    So we see recent coverage that breathlessly celebrates the fact that the rate of cost increases has lately slowed down all by itself. It’s along the lines of “Thank God: the river that was rising and about to overflow its banks has—mirabile dictu—stopped its rise, and we may all escape drowning after all!”

    Get a grip, folks. The level of health care spending will be exactly what we collectively decide to make it. At current levels, there is MORE than enough money to provide (in a sane system) basic, decent care for everybody. Perhaps you can’t have a $200,000 treatment that might extend your life by a few weeks, but that treatment didn’t even exist a few years ago. And more and more (as with recent findings on coronary bypass and angioplasty surgery), we are discovering that these heroic treatments don’t really do much except fatten doctors’ wallets.

    We have basically written a blank check to the medical-industrial complex, so they keep finding ways to increase the tab. Given the potential profits involved, should we find this surprising?

    The reigning expert on business innovation, Clayton Christensen, has asked the right question: not “How can we afford health care?”, but “How can we make health care affordable?”. There are lots of potential answers; it’s time we tried some.