Slow growth in health spending due to recession, weak economy

by | Apr 23, 2013

The recession and weak recovery are by far the biggest culprits behind recent record-slow growth in health spending, according to a new analysis. The results suggest that any relief enjoyed by employers, households or state and federal budgets as the downturn dampened health spending could evaporate as the economy rebounds.

The analysis, by the Altarum Institute and published by the Kaiser Family Foundation, also suggest that it’s premature to credit health policy and marketplace changes that have been widely cited as potential mechanisms to create a lasting slowdown in health spending that has historically grown faster than the economy, economists said.

“It’s too early to tell whether the slowdown is permanent,” said Jonathan Skinner, an economist and health policy expert at Dartmouth College. Skinner is an adviser to the Altarum Institute. “Certainly, the results of this survey could suggest more caution in interpreting the slowdown as permanent.”

Initiatives by policymakers, hospitals, doctors and insurers to put a break on health spending—including new payment models such as accountable care and bundled payments—could someday show results, but are so far too new to have made much difference in recent years, said Paul Ginsburg, an economist and president of the Center for Studying Health System Change.

Accountable care, along with bundled payments, were among new payment policies included in the 2010 Patient Protection and Affordable Care Act that seek to tie reimbursement to performance and reduce health spending. Medicare last year expanded a test of accountable care that began in 2012 with 32 contracts; the agency now has 250 organizations with accountable care deals. Commercial insurers have also entered into contracts with financial incentives for controlling healthcare costs.

But so far, none of those initiatives appears to be what’s driving significant and persistent cooling in the pace of health spending growth, according to Altarum’s calculations. Rather, it’s the economy.

The analysis said 77% of the slowdown in health spending between 2008 and 2012 was a result of the economic downturn. Health spending growth during those years grew 4.2% per year, on average, compared with 8.8% between 2001 and 2003.
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The economy’s drag amounts to a 1.49% change in health spending for every 1% change in gross domestic product, the analysis said, though not immediately. Economic changes can continue to ripple through health spending for six years, the report said. That lag could be the result of insurance that protects households from the cost of care and employers who may not immediately change benefits in response to a downturn. Households may be reluctant to stop seeking care.

Changes to Medicare and Medicaid may also take time as policymakers debate options. And hospital leadership may also need time to alter capital spending plans.

Federal estimates by the CMS Office of the Actuary found health spending grew 3.9% in 2011, the most recent year available, and each of the last two years. That is the slowest growth rate since 1960. Health spending increased moderately to 4.3% in 2012, according to an Altarum estimate.

Without more widespread use of cost-control efforts, health spending will rebound to 7% with an economic recovery, Kaiser Family Foundation senior officials wrote in the Washington Post opinion pages. More spending restraint efforts could lower spending growth by a percentage point, which would save $2 trillion over 10 years, wrote Drew Altman, the foundation’s president and CEO, and Larry Levitt, its senior vice president.

“We need to be realistic about the fact that health spending will start going up more rapidly again as the economy improves,” they wrote. “But how much costs escalate is at least in part within our control, and that matters a lot for federal and state budgets, employers and families. The place to start is by recognizing that the problem of healthcare costs is far from solved.”

Charles Roehrig, director of Altarum’s Center for Sustainable Health Spending, said he believes that pressure on hospitals and doctors to curb costs from policymakers grappling with deficits and aging baby boomers may prove too great to allow health spending to accelerate to historical levels.

Maryland recently proposed a limit on hospital spending growth to the state’s long-term economic growth. Roehrig noted Massachusetts also moved late last year to tie health spending to the state’s economy.

From: Modern Healthcare