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Health Spending -- Under Control?

Health Spending -- Under Control?

By Robert Samuelson - December 15, 2014

WASHINGTON -- Has the monster of exploding health costs finally been slain? After five years of slow spending growth, it's tempting to think so. This would be fabulous news, because rising health spending has had damaging side effects. It's reduced workers' take-home pay, as employers devoted more compensation dollars to insurance and fewer to wages and salaries. Growing government health spending (mainly through Medicare for the elderly and Medicaid for the poor) has had a similar effect. It's squeezed other public programs.

The trend lines seem favorable. Recently, the Centers for Medicare and Medicaid Services (CMS) reported that from 2009 to 2013 annual increases in health spending averaged only 3.9 percent -- well below historical experience. As recently as 2007, the gain was 6.3 percent. The result: Since 2009, health care's share of the economy has stabilized at 17.4 percent of gross domestic product (GDP). Although that's $2.9 trillion ($9,255 for every American), health care is no longer siphoning more resources from the economy's other sectors.

Can this continue?

Unfortunately, experts disagree. Differing on what's caused the slowdown, they split on how long it will last.

One theory is that a weak economy translates into weak health spending. A study last year by the Kaiser Family Foundation -- a nonpartisan research group -- attributed three-quarters of the slowdown to the economy. The trouble is that there's no simple explanation of why. The conclusion reflects a "statistical analysis of 50 years of health spending and economic trends." Larry Levitt, one of the study's authors, says these relationships predicted a continued slowdown in 2013. Now, spending is expected to accelerate.

Other analysts argue that the spending slowdown began before the recession, suggesting that the causes lie elsewhere.

One underappreciated change has been the rise of high-deductible insurance policies coupled with "health savings accounts" (HSAs). The HSAs allow workers and companies to make tax-free contributions that can be used for out-of-pocket health expenses.

When people spend their own money -- not insurance funds -- they're usually more careful in how they use health care, says Grace-Marie Turner of the Galen Institute, an HSA advocate. The CMS report agreed, finding that consumers "in high-deductible plans tend to use [health] services at a lower rate than those enrolled in plans with lower or no cost-sharing."

To control costs, companies have increasingly switched to high-deductible plans with HSAs. These plans have gone from 4 percent of covered workers in 2006 to 20 percent in 2013, according to Kaiser. There's been "a veritable sea change in the nature of insurance [that's] unfolded without much scrutiny or debate," wrote Kaiser's Drew Altman in a recent blog post.

Insurance is becoming insurance. It's focused on paying for serious illnesses and not covering routine medical bills. (In 2014, the rules governing HSAs require that the accompanying insurance policies have deductibles of at least $1,250 for single coverage and $2,500 for families, says Turner.)

These market pressures have doubtlessly restrained costs. So have regulatory shifts. The Affordable Care Act (aka, Obamacare) has reduced Medicare reimbursement rates. Medicare spending was slashed a further 2 percent when budget "sequestration" was triggered in early 2013. Sequestration imposed across-the-board cuts on many government programs.

Regulations are also forcing hospitals to become more cost conscious, says Dan Mendelson of the health consulting firm Avalere. Medicare's reimbursement rules penalize hospitals deemed to have excessive readmissions. Private insurers are adopting similar incentives, says Mendelson. The obvious question is whether greater cost consciousness improves care or undermines it.

So: Two broad theories address health spending's slower growth. One highlights the economy. The other -- though not ignoring the economy -- emphasizes policy and behavioral changes. It matters which is more correct.

Health spending faces increases from three sources: Obamacare (more people will be insured); an aging population (older people use more health care); and expensive new medical technologies. If market and regulatory pressures don't offset these gains, spending may again outpace the economy.

That's what CMS anticipates. By 2023, health spending will hit 19.3 percent of GDP, up from 17.4 percent today, it predicts. Health care would resume draining resources from the rest of the economy. The trick is to prevent this without compromising the quality of care. No small feat. 

(c) 2014, The Washington Post Writers Group 

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