Health Care Spending Projections May Be Overstated by $770B

Growth in health care spending has been slower than expected, in part because of the 2007 to 2009 recession, but a new study suggests the recession only explains part of the slowdown.

This article published with permission from The Burrill Report.

Growth in health care spending has been slower than expected, in part because of the 2007 to 2009 recession, but a new study suggests the recession only explains part of the slowdown. It argues structural changes are a key contributor, and if the trend persists, government projections on rising costs may overstate the actual increase in expenditures for 2013 to 2020 by as much as $770 billion.

According a study in the journal Health Affairs by Harvard University economist David Cutler and researcher Nikhil Sahni, the recession only accounted for 37% in the increase in U.S. health care spending between 2003 and 2012. Health care spending grew 5.7% between 2001 and 2003, but fell to 0.9% from 2010 to 2012.

“If health care spending growth remains at its current low level, the official forecast will significantly overstate spending in the latter years of this decade,” the authors write.

The authors say a decline in private insurance and cuts that were made to some Medicare payment rates explain only an additional 8% more of the slowdown. That leaves more than half of the slowdown — some 55% — still unexplained.

That, suggest the authors, is most likely due to a series of other explanations including a slowdown in drug spending as patent expiration on blockbusters leads to a greater use of generic drugs and the use of tiered formularies to control the use of costly drugs.

Drugs accounting for 17% of total prescription drug spending will lose patent protection during the next five years. The growth in prescription drug spending slowed to just 2.3% annually during 2003 to 2012 compared to 10.1% annually during 1993 to 2001. Similarly, the researchers say, the costs of imaging technology rose rapidly from 1996 through 2005, but then flattened.

At the same time, increased cost sharing is likely another factor at play, such as deductibles for employer sponsored health care and increasing copayments for physician visits. The higher copayments appear to be affecting utilization. Physician visits continue decline even though the recession has ended, falling 17% from the second quarter of 2009 to the second quarter of 2011.

There has also been improved efficiency among providers. Data suggest readmission rates are falling, as well as the rate of hospital acquired infections at some medical centers. One quality improvement and cost-cutting effort known as the QUEST collaborative is credited with saving $9.1 billion at 333 hospitals from 2008 to 2012.

The authors say that an extended slowdown in growth in health care spending would not only provide relief to government, but also provide similar benefits to businesses and households.

“Slow health care spending growth,” they write, “might thus bring much-needed relief throughout the economy.”

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