September 16, 2014

National Health Expenditures: Good News Is Real But Likely Temporary

The Medicare actuaries have just updated their projections for National Health Expenditures (NHE) and the overall picture they illustrate is a welcome one, but likely reflects temporary factors and cannot serve as an excuse for politicans to rest on their laurels.

On the plus side, health care cost inflation has slowed pretty dramatically over the last three years (2009-2011) and is also projected to be slower than normal for 2012 and 2013 -- with those costs staying nearly constant as a percent of GDP throughout the entire time period (around 17.9 percent). Furthermore, while spending is projected to jump in 2014, as the major health insurance provisions of the Affordable Care Act (ACA) extend coverage to approximately 22 million people, over the period 2011-2021 spending is projected to grow at an annual average of 0.9 percent above GDP growth. This is good news because most budget experts consider health care cost growth of 1 percent over GDP the "gold standard" for a tough, but theoretically obtainable, spending target. (Historically, health care costs have risen 2 percentage points faster than GDP.)

The actuaries suggest most of the recent slowdown in health care spending can be attributed to the recession and its effect on patients' willingness to spend limited resources on health care as well as a dampened willingness on the part of providers to increase their prices. Most health care experts agree that the recession is the driving force behind the slowdown although some also highlight changes that insurance companies, hospitals and physician groups have been making either because of the ACA or in anticipation of its full implementation. 

By the end of their projected time period, however, the actuaries anticipate health care spending growth will rise back to the GDP plus 2 percent average -- a projected growth amount with the ACA that is identical to the amount they projected prior to the ACA. 

This return to normalized health care inflation happens because the actuaries assume the aging of the population, the increase in the newly insured under the ACA, and renewed economic growth will put upward pressure on spending that will outweigh the efforts in the ACA that are designed to restrain cost growth.

This points to a need for caution as we approach the Supreme Court's decision on the constitutionality of the Affordable Care Act. On one hand, if the Supreme Court allows the ACA to stand, that doesn't mean there should be any sense of finality for health care reform efforts. There can't be a declaration that the ACA has already succeeded in slowing costs based on temporary successes that might disappear as the economy picks up. Hopefully, the decision will allow politicians to put the debate over the ACA behind them and move on to enact further efforts to constrain health care cost growth over the long term.

On the other hand, if the Supreme Court invalidates all or part of the ACA, it is imperative that politicians do not get tempted to maintain or renew some of the more popular coverage provisions of the ACA, while jettisoning the less popular efforts designed to restrain cost growth. As the actuaries' graph shows, even with those unpopular cost controls we are fighting an uphill battle against health care inflation -- without them, the situation will only get worse.