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The Dramatic Slowdown in Health Costs and What It Means for the Economy, Families and the Budget

New data out yesterday from the Centers for Medicare and Medicaid Services (CMS) and discussed in a piece in Health Affairs show that economy-wide health spending continues to grow at a historically slow rate.

New data out yesterday from the Centers for Medicare and Medicaid Services (CMS) and discussed in a piece in Health Affairs show that economy-wide health spending continues to grow at a historically slow rate.  After adjusting for inflation, health spending growth was 1.7 percent (3.9 percent nominal) in 2011, is estimated at 2.1 percent in 2012 (3.9 percent nominal), and is projected at 2.3 percent (3.8 percent nominal) for 2013.  Assuming the projections hold, these rates of spending growth are the three lowest on record, well below the 4.2 percent average inflation-adjusted rate observed over the decade ending in 2010 and the 5.5 percent average inflation-adjusted rate from 1965 to 2010. As the President said earlier today, these reductions in health cost growth are good for American companies’ bottom lines, good for our economy, and good for jobs.  

growth in health expenditures

A Broad-based Slowdown in Health Spending

The CMS figures show a slowdown that continues to affect all portions of the health sector.  Over the three record-setting years from 2010 to 2013, inflation-adjusted per-beneficiary spending by private insurers is projected to grow by just 1.6 percent.  The comparable figures for major public health insurance programs are even lower: 0 percent for Medicare and -0.5 percent for Medicaid.  All of these rates are well below the average growth rate of inflation-adjusted per capita health spending over the decade ending in 2010 (3.2 percent) and the growth rate over the longer period 1965 to 2010 (4.4 percent).  Moreover, the slowdown continues to affect virtually all categories of spending, with particularly large reductions for pharmaceuticals, for which spending has actually fallen in real terms over this period.

The New Data from CMS are Consistent with Other Evidence of the Slowdown in Health Costs

general and health care inflation

Yesterday’s news from CMS adds to several other recent pieces of evidence showing a slowdown in health spending and prices:

  • Health care prices: As featured in yesterday’s Wall Street Journal and reported in a White House blog post last month, prices for health care goods and services have been growing at historically slow rates.  Over the one-year period ended in July 2013, prices for personal consumption expenditures on health care goods and services rose by just 1 percent, the slowest rate in 50 years. Additionally, health prices grew more slowly than the prices of all goods and services from July of 2012 to July of 2013.  Health inflation has been below overall inflation on a July-over-July basis  only six times in the last fifty years.  Prices tend to be less affected by the economy than utilization of services, suggesting that other factors are at work.
  • Employer health benefit costs:  Last week, the Bureau of Labor Statistics reported data on the average hourly cost of health insurance benefits for US employers.  Over the three year period from June 2010 to June 2013, real per hour costs have risen at an annual rate of just 0.4 percent, well below the average rate of 2.6 percent recorded over the prior five years (the longest historical period for which these data are available).
  • Health insurance premiums:  Last month, the Kaiser Family Foundation reported estimates of average health insurance premiums from its annual survey of employers.  Kaiser found that inflation-adjusted premiums for employer-provided family coverage grew just 2.3 percent (3.8 percent nominal) from 2012 to 2013, less than one third the rates observed in the early 2000s.

The Slowdown in Health Costs Is Good for Families, Jobs and the Budget

The slowdown in health costs has widespread benefits including:

  • Lower costs for families. Census data released earlier this week show that median out-of-pocket medical costs, including both premium contributions and cost-sharing, grew at an inflation-adjusted rate of just 0.5 percent from 2010 (the first year Census collected these data) to 2012.  And with expanded coverage through the Health Insurance Marketplace and Medicaid starting next year, there will soon be even more affordable options.  A new study from the Department of Health and Human Services finds that nearly six in ten uninsured Americans will newly qualify for health coverage that costs less than $100 per person per month.
  • More jobs and higher earnings. In the short- and medium-run, a slowdown in the growth rate of health care costs translates in part into lower costs for employers—thus giving them a greater incentive to expand and create jobs.  Moreover, economists agree and research demonstrates that, in the long-run, businesses will pass much or all of the money saved on health benefits onto their employees in the form of higher wages. 
  • Helping reduce the short- and long-run deficit. In addition to reducing financial pressures on families and employers, the recent in slowdown in health spending growth has substantially improved the US budget outlook.  Yesterday, the Congressional Budget Office released updated long-term budget projections showing that, over the next 25 years, spending on federal health care programs will be more than 0.3 percentage points lower as a share of the economy than in CBO’s comparable projections from June 2012.  For comparison, CBO estimated that the “fiscal gap” – a measure of the overall size of the fiscal imbalance faced by the federal government– is 0.8 percent of the economy over the next 25 years.   These reductions in health care costs are therefore making a sizeable contribution to improving the U.S. fiscal outlook as well.

The Evidence Suggests Structural Changes Contributed to the Slowdown in Health Costs

Going forward, a key question for families seeking affordable health care, for businesses concerned about their bottom lines, and for anyone watching the federal budget is what is causing the slowdown in health spending, and whether those factors are likely to persist.  

The CMS analysts ascribe much of the recent slowdown to the 2007-2009 recession and its aftermath and therefore project an acceleration of health spending growth in the years ahead.  Several other analyses have concluded that only a small fraction of the current slowdown can be attributed to the recession, and that much of the slowdown reflects deeper changes affecting the health sector:

  • A recent analysis by David Cutler and Nikhil Sahni uses an estimate of howincome affects the demand for health care to simulate how health spending would have evolved had the fall in incomes caused by the recession not occurred.  They conclude that only about one-third of the slowdown can be accounted for by the recession and that the bulk of the slowdown reflects “fundamental changes” in the health sector.
  • An analysis by Michael Chernew and co-authors examines whether the slowdown can be accounted for by job loss or by increases in the cost-sharing faced by consumers as firms began offering leaner health insurance during the recession.  They find that the reductions in spending growth are, if anything, larger among employed individuals and that increases in cost-sharing can account for only one-fifth of the slowdown.  Much like Cutler and Sahni, they advise a “cautious optimism that the slowdown in health spending may persist.”
  • A recent analysis by economists at the Congressional Budget Office highlights the fact, noted above, that the slowdown has occurred in Medicare as well as the private sector.  Because, in general, seniors are more insulated from a weak labor market, this fact suggests that the slowdown is not driven solely by reductions in income due to the recession.  The CBO analysts also show, using state-level data on Medicare spending, that health spending growth has historically risen when unemployment rises, the opposite of the pattern required for elevated unemployment to explain the slowdown in cost growth.

It is clear there have been changes for the better in the U.S. health sector.  But now is no time to get complacent, and that’s why the President is focused on successfully implementing the Affordable Care Act, which includes numerous policies to improve the affordability and quality of health care, from paying for value to integrating care to driving out waste in the system.  That’s how we will keep this momentum going.