Health Growth Slows – Will We Lose Our Burning Platform?

Today’s Managing Health Care Costs Indicator is 3.9%

Click image to enlarge. Source 

Health Affairs just published the annual review of health care spending (from 2010) as calculated by the CMS Office of the Actuary.   The headline in the New York Times is “Recession Holds Down Health Spending,” and the Wall Street Journal says “Weak Economy Curbs Health Spending.” Total health care spending was up only 3.9% - and reached about $2.6 trillion. Overall increase in GDP was 4.2% - making this the first year overall GDP increased more than health care spending in my memory.

The study showed:

-        The effect of the Affordable Care Act on overall health care costs was 0.1-0.2% (by increasing access)

-        Hospital spending up only 4.9% (despite the aging of the population)

-        Professional services (mostly physicians) were up only 2.6%

-        Prescription drugs were up a measly 1.2% - reflecting more generic usage

Out of pocket medical spending was up only 2.8% - a surprise to me given that so many more families are covered by high deductible health plans. That’s an indication that many Americans have been deferring or foregoing health care that they would have received just a few years ago.

Increases by source of health care spending:

-        Employer Premiums: 6.3%

-        Out of pocket: 2.8%

-        Medicare: 7.0%

-        Medicaid: 9.2%

Government spending on health care is up – but don’t assume this means that government is less efficient. Rather, the Medicaid rolls went way up, and Medicare enrollment has increased as well as we continue to live longer and the baby boom ages in to Medicare. Ezra Klein had this graphic yesterday showing that effective inflation rate in government programs is considerably lower than that for private insurance plans.

Source 

We know separately that maternity rates are dramatically down as a result of the recession. These are likely to return to prerecession levels in the future – which will lead to increases in hospital and professional costs.

Source Click Image to Enlarge 

It’s heartening to see health care costs leveling off – but I hope that the sense of urgency in redesigning our health care system will not recede.  Health care still costs far too much, and we must make meaningful efforts to be sure we get more value from the health care system.  Health care is crowding out other important public investments, including education – which can have a larger long-term impact on population health and life than many of our health care system expenditures. And even if Medicare is relatively “efficient,” we can’t afford this program as my generation becomes eligible.

2010 was a good year in terms of health care cost increases.  However, this wasn’t the payoff from great efforts on health care reform; it was rather the consequence of a grim economy.  We’ll have to redouble our efforts to control costs in the environment of economic growth we hope for in the future. 

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CMS Actuary Projects Future Health Care Growth

Today’s Managing Health Care Costs Indicator is 19.8%

Click to enlarge.  Source

Health Affairs published the 2011 CMS Actuary projections of health care cost growth over the next ten years, and there are some important observations.   As the report points out, these are projections – and the model has to make a series of assumptions, many of which are dependent upon the overall economy, changes in legislation and regulation, and provider reactions to payment reform.

Some of the conclusions:

·        The total spending on health care will almost double between 2008 to 2020, from $2.4 trillion to $4.6 trillion. 

·        Health care overall will increase at a rate about 1% faster than GDP growth.

·        Health care now represents 17.6% of the GDP, and will grow to 19.8% of the GDP by 2020.

·        The portion of health care expenditures that are government payments will approach 50% during this time period, and the federal portion of direct health care expenditures will increase from 27% to 31% 

·        Medicare increases due to aging population are substantially dampened by payment cuts of the Affordable Care Act

·        Eliminating the (unimaginable) SGR 29.4% physician payment cut scheduled for January 1, 2012  would mean that the Medicare increase would jump from 1.7% (substantially below GDP growth) to 6.6% next year.  The SGR elimination is not factored into the chart above – but it has the same impact on projections with or without the Affordable Care Act.

·        The impact of the Affordable Care Act is negligible until 2014, when there is a one-year bump in medical inflation due to the large number of Americans who will receive insurance

·        There are many “winners” in the 2014 payment bump:

·        Prescription drug spending would increase by 10.7%, more than double the increase without the ACA

·        Physicians (8.9% bump, about 1/3 increase)

·        Hospitals (7.2%, just a 1% increase, since many of the newly-insured are healthier than those who were habitually uninsured.

The total cost of increase in coverage is relatively modest, although I suspect both supporters and opponents of the Affordable Care Act will cite this study to support their point of view.   The pressure to constrain future growth in health care costs will continue unabated.

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Health Care Reform Will Lower Long Term Medical Costs

Click to enlarge

This image from The Washington Post

There has been a lot of blathering about how the new estimates from the CMS actuary show that health care reform will increase the cost of health care.   In fact, the Wall Street Journal's headline is "Health Outlays Still Rising".

Here's the commentary in the WSJ:

The report by federal number-crunchers casts fresh doubt on Democrats' argument that the health-care law would curb the sharp increase in costs over the long term, the second setback this week for one of the party's biggest legislative achievements.


The graphic above is from a pithy post by Ezra Klein of the Washington Post, who points out that there is a cost spike from providing subsidies to cover 10% of the population.  It's striking that in the out years (and that's what counts), the costs are lower under health care reform even with the near-universal coverage.


The costs are lower because of diminished provider payments, which will extend the life of the Medicare trust fund, as well as make it possible to cover most of the currently uninsured while lowering the federal deficit.    The reform bill is far from perfect - but is looking like a very good deal indeed. 

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Baumol's Law: Will Health Care Costs Always Exceed Inflation?

David Herszenhorn has an interesting article in today's New York Times suggesting that it's not possible to get health care cost inflation below the general rate of inflation.  He interviews and quotes economist William Baumol, who wrote an article in 1966 pointing out that while many tasks got less expensive over time, others required similar labor input - and thus the cost did not decrease.

Baumol's academic studies were around performing arts.  A Mozart quintet took 5 musicians in the 1700s, and still takes 5 musicians today.  A flat screen TV is manufactured with far fewer inputs today than it was a few years ago -hence the cost comes way down.

Although Herszenhorn doesn't mention it, this relates directly to the CMS Actuary's contention that it requires flawed logic to assume we can lower Medicare fee increases to account for future 'productivity increases.'

I acknowledge that it's more difficult to reengineer health care delivery than to optimize a manufacturing process. It's not easy to get doctors to rethink their approach, and demands of patients facing loss of life or health are different than demands of consumers in Best Buy.   However, unlike the string quintet, there are elements of health care where input costs can be dramatically decreased.  Efforts at implementing Toyota production techniques at hospitals have dramatically decreased the number of steps required.  Most of us who have visited a physician office recently in the US and seen how many staff are required to do administrative (nonclinical) tasks know that there are substantial productivity gains possible in health.

Further, countries with robust growth tend to have large increases in health care costs, while countries undergoing economic contractions (think Russia after the fall of the Soviet Union, or Argentina after the currency failure) tend to have health care costs that go down.   Countries like Russia with declining health care costs, though, also often have far worse outcomes.  This would suggest that overall, health care costs are sensitive to the overall economy - lowering health care costs (or health care inflation) is difficult in good economic times, and easier in tough times.

I don't think Baumol's Law unequivocally tells us we can't manage health care costs.  It does provide insight into why it's so difficult.

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