Health Care Spending Is Slowing Because Americans Control More Of Their Health Dollars

This is a very well written and thorough article explaining why we have seen some recent moderation in healthcare costs from Avik Roy writing at Forbes:

There’s been a lot of discussion about the recent slowdown in the growth of national health expenditures. Over the past five years, while spending continues to grow, it has grown at a slower rate than in the years prior. The Obama administration, naturally, is claiming that Obamacare is responsible—even though the slowdown started before the President took office. Whatever you think of Obamacare, however, there are two far more convincing reasons why health spending has slowed.

The first is the Great Recession, which has slowed health spending around the world. The second is that Americans are now much more responsible for their own health spending, a development that has made them more frugal.

U.S. spending growth exceeded the OECD in 2010 and 2011

When we think about the rate of growth in U.S. health-care spending, the first thing we should always look at is our peer group in the industrialized world. The most common way to do this is to look at the data on health spending from the Organization for Economic Cooperation and Development, or OECD.

And if you compare U.S. health spending to that of the OECD countries, what do you find? As you can see in the chart above, U.S. spending growth (pink) was lower than the OECD average (black) in the years prior to the passage of Obamacare in 2010, and higher than the OECD average in the years afterward. On an absolute basis, the U.S. health spending growth rate has increased in 2010 and 2011, relative to 2009.

Overall, growth in health spending in the developed world has declined since the onset of the Great Recession, and that’s the most obvious explanation for why health spending growth has declined in the U.S. since 2008.

Out-of-pocket costs are on the rise

Another likely factor in the slowdown is the fact that Americans are paying much more directly for the cost of their own health care.

According to a recent report from the Commonwealth Fund, which keys off of the government’s Medical Expenditure Panel Survey, private health insurance deductibles have increased by 117 percent for single-person coverage, and by 106 percent for family coverage, between 2003 and 2011.

For the average single-person plan, deductibles have gone up from $518 in 2003 to $1,123 in 2011. For family plans, they’ve gone from $1,079 in 2003 to $2,220 in 2011. In both cases, they’ve more than doubled over an eight-year timeframe.

Furthermore, in order to keep wages from going down, employers have been requiring workers to assume direct responsibility for more of their health insurance premiums.

In one sense, that’s neither here nor there—the money is coming out of the worker’s pocket in either case—but because employer-based health spending is tax-free to the worker, the net effect of higher worker premiums is less disposable income to spend on things that aren’t absolutely necessary.

So the fact that the employee share of employer-sponsored premiums has gone up by 74 percent—from $2,283 per family in 2003 to $3,962 in 2011—has also had an effect on consumer health spending. As of 2011, average premiums for non-elderly private insurance represented 21.5 percent of median household income, up from 14.9 percent in 2003.

More employers are offering health savings accounts

Employers have tackled rising health costs with two other methods: dropping coverage altogether, and sponsoring account-based health plans, such as plans with health savings accounts (HSAs) or health reimbursement accounts (HRAs).

The percentage of employers who offer health coverage to their workers has steadily dropped. In 2000, 64 percent of Americans enjoyed employer-sponsored coverage. In 2010, that number had dropped to 55 percent. In 2011, only half of private-sector firms offered health coverage to their workers. Of those who still do, an increasing number are moving to the most cost-effective form of health-insurance: high-deductible coverage combined with an HSA or HRA....

Medicare drug spending has come in 40% below budget

The other big driver of slower U.S. health spending is the Medicare prescription drug benefit, which has come in 40 percent under budget, and is the largest component in the Congressional Budget Office’s downward revision in Medicare spending.

Of course, the Medicare drug benefit increased Medicare’s growth in its early years. But since then, the competitive, market-based system designed by the Bush administration was able to take advantage of generic drugs in a way that the old-style single-payer system did not. Today, over 80 percent of all prescriptions in the United States are for inexpensive generic drugs....

The bottom line is that, as the cost of health care has continued to escalate, employers have been requiring workers to shoulder more of the responsibility for their own health spending. That trend, in turn has led workers to be more frugal in how they spend their health dollars. That’s as it should be.

Obamacare, far from being responsible for these trends, could very well reverse them. The law heavily subsidizes and mandates more consumption of health-care services, enough that Obamacare could overwhelm the system’s general trend toward higher-deductible health plans. The Affordable Care Act closes the Medicare donut hole, the key cost-sharing provision of the Medicare drug benefit; and Obamacare constrains the utilization of high-deductible health plans.

It’s easy to waste other people’s money. But when you’re paying directly for care, especially in a challenging economy, you’re going to be much more mindful of how you spend it.

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UPDATE 1: For further reading on this topic, I can recommend a piece by Yuval Levin in National Review. Yuval concludes:

The aging of our society, combined with the character of Obamacare, offer some strong reasons to expect that health-spending growth will begin to rise again in the near term and in any case that (because of the demographic facts especially) in the decade after this one we will confront an immense and unprecedented entitlement funding challenge. Medicare, in particular, requires fundamental reform to be made sustainable. And the most recent relative slowdown of costs in that program suggests a path for such reform. The prescription drug program most responsible for CBO’s mildly improving outlook on Medicare spending is a premium support plan of exactly the sort that the House Republican budget proposes for the larger program. And the economic logic behind it is of exactly the sort that is behind some of the key conservative alternatives to Obamacare.

Those reforms could help constrain both national health spending and federal health spending, and they would be very good for growth, without shirking the government’s obligation to the needy and the elderly. That’s the difficult combination we need, and every passing year of denial and distortion makes it more difficult to achieve such reforms without major disruptions in the lives of vulnerable people.

Maybe the growth of health costs will start slowing again. Maybe Obamacare will not significantly increase it. Maybe Medicare will somehow be fine. Maybe. The facts are not in, but the prospects don’t look good.

UPDATE 2: It’s worth noting that the percentage of national health expenditures derived from out-of-pocket spending has declined over the last ten years. It was 14.6 percent in 2000 according to the Centers for Medicare and Medicaid Services, compared to 12.6 percent in 2006 and 11.4 percent in 2011. This is largely because while private-sector cost-sharing has gone up, more Americans are enrolling in public programs like Medicare and Medicaid. I touched on the Medicare slow-down above; with Medicaid, cost growth is largely managed by paying doctors and hospitals less. (This is also true of Medicare, to a less drastic degree.)

The CBO’s commentary on the Part D slowdown can be found here. Another factor, the spillover effect of Medicare Advantage on lower Part A and Part B costs, is summarized in the slide below.