Why has health cost growth slowed so much? It's the economy, stupid

April 23, 2013

The good news: Health cost growth has slowed down so much in recent years that it's increased at the lowest rate since the government began tracking it 50 years ago.

The good news: Health cost growth has slowed down so much in recent years that it's increased at the lowest rate since the government began tracking it 50 years ago.

The bad news: A new study from the Kaiser Family Foundation shows that 77% of that slowed growth can be attributed to the moribund U.S. economy of recent years. And as the economy picks up again, healthcare cost growth is expected to return to its historical annual rates, exacerbating what's already arguably the biggest problem in U.S. healthcare.

A little background: From 2001 to 2003, healthcare spending grew at its peak rate, an average of 8.8% per year-an unsustainable rate that greatly exceeded overall economic growth. From 2009 to 2011, spending growth took a sharp downturn, to an average annual rate of 3.9%, according to a statement from Kaiser.

Given that the United States spends around $2.8 trillion per year on healthcare, questions around what's driven that slower spending have been top-of-mind issues for health economists and health policymakers alike.

Now, the Kaiser study has shown that the economy "produces a major but delayed effect on the nation's health spending." Because the recession ended in 2009, that lag in health spending is expected to be in effect for a few more years, before health spending growth returns to around 7% annually, according to the Kaiser study.

Still, as Sarah Kliff of the Washington Post points out, there is some reason for optimism contained in the Kaiser study. Namely, if the economy is responsible for 77% of slowed health spending, what's responsible for the other 23%?

The answer is "changes in the healthcare system," such as higher deductibles and other cost-sharing that dampen patients’ use of services, as well as various forms of managed care and delivery system changes, according to Kaiser.

That means options are available to policymakers that could reduce the growth in health spending, and that's not insignificant. Trimming anticipated growth by even a single percentage point, for example, could reduce spending by more than $2 trillion over the course of a decade, with big implications for government, private-sector and family budgets, according to the statement.

Any reduction in healthcare cost growth would be welcome news for American families. A 2011 study in Health Affairs found that, for the median-income family of four, income growth over the prior decade was wiped out by increased spending on healthcare.

Notably, the study found that the median-income family would've had an extra $5,400 per year to spend on other things, had healthcare cost growth simply risen at the same rate as inflation.

 

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