Diagnosing the Real Reasons For Reduced Healthcare Spending

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Signs of a revival of the U.S. economy may remain mixed, but at least one sector is booming. There's a growth market for health economists scrambling to explain the reasons for a slowdown in the rate of national health spending in recent years. Unfortunately, too many of their diagnoses of the past and predictions for the future seem to track their political hopes and wishes more closely than the underlying evidence.

Official government statistics from actuaries at the Centers of Medicare and Medicaid Services (CMS) lag behind current spending numbers by about one calendar year. They indicate that national health expenditures continued to grow much slower (compared to past long-term trends) for three consecutive years from 2009-2011. The latest annual growth rate of 3.9 percent in 2011 closely tracked the slow annual rate of growth in the overall economy. Numbers for 2012 are expected to be similar. The Congressional Budget Office recently lowered its baseline forecast for the rate of growth in future Medicare spending.

On the surface, this looks like good news and a break in the previous pattern in which national health spending steadily grew about 2 percent to 2.5 percent more rapidly each year than the underlying national economic resources that have to finance it.

Ironically, few, if any, of the most visible "expert" academic analysts saw this latest trend coming until very recently, if at all. Yet there is no shortage of catch-up explanations by some of them for describing why it happened. The best predictive variable may turn out to be the correlation between an expert's retrospective diagnosis and his broader preferences for current and future health policy.

For example, last month's issue of Health Affairs featured a series of articles on health spending trends. They also were recycled at several health policy conferences in Washington, DC and Princeton, NJ. (Readers with real lives and real jobs need not worry; you didn't miss much!). The primary takeaway message promoted was that further good times of more affordable health care might be ahead, thanks to the magical powers of Obamacare. (It apparently slowed down health spending even before it was implemented!)

The somewhat "older" mainstream explanation for the health spending slowdown had pointed to the deep recession of 2007-2009, plus a very slow economic recovery thereafter. Of course, no single factor ever explains everything. The pace of adoption of new health technology (particularly pharmaceutical products) also slowed during this period, and at least some health care providers experimented with various cost-reducing practices. Analysts at the Altarum Institute (who were ahead of curve in highlighting the health spending trend) even have presented a somewhat statistically tortured case in the past that the early stages of the spending slowdown predate the Great Recession by several years.

But CMS actuaries tend to concur that the recent severe recession (unlike past ones since World War II) had an immediate and deeper effect on health care spending, which then persisted for several more years. They also concluded that the impact of early provisions of the Affordable Care Act in effect in 2010 and 2011 was "minimal."

The opposite camp is led by Harvard economist (and full-time Obama supporter) David Cutler. He argues that the 2007-2009 recession accounted for 37 of the slowdown between 2003 and 2012. Try not to pay attention to the change in time periods; the more imaginative sleight of hand involves Cutler's first finding that 53 percent of the spending slowdown is "unexplained" by his model, but then nevertheless proceeding to attribute other unmeasurable qualitative factors as likely causes. Hint: the Affordable Care Act's (ACA's) payment rate changes loom large as a positive one, in stimulating greater efficiency by health care providers.

Cutler even more creatively suggests that increased cost sharing was an additional important factor slowing the growth of health spending over the past decade. He points to increases in the share of covered workers with deductibles greater than $1000, as well as the real rates of increase in average dollar amounts of deductibles and copayments in some types of employer plans, from 2000-2012.

But here's the problem behind those numbers. One of the few consistent trends in annual national health spending data, since 1960, is that in almost every year, the share of out-of-pocket spending has declined. In the last full year on record (2011), it dropped again, to 11.39 percent. And when the ACA's expanded subsidies and rules for insurance coverage kick in during 2014, out-of-pocket spending is projected to fall to 10.15 percent of total national health spending and continue to drop down to reach 9.4 percent in 2021. This trend alone is expected to increase spending.

Cutler tries to sidestep the actual numbers by claiming that even though the relative expense of cost sharing is dropping compared to premiums (which insure the overwhelming share of health services), the nominal amount of deductibles and copays remain too high for consumers with falling real household incomes. His version of health spending math pays no attention to the difference between numerators and denominators, and the relative percentage of the likely effects that they reveal.

This economic tap dance around the still-diminishing role of cost sharing in overall health spending seems rather contorted and one-sided. It stubbornly ignores the more clear-cut cumulative trend established for decades: Americans overall will continue to use more expensive health care covered by private and public insurance, because they are increasingly spending more of other people's money! Recent increases in high-deductible plan coverage in some sectors of the labor market have not yet made a dent in the aggregate dynamics of such third-party spending.

A somewhat more balanced middle ground position is advanced by a different Harvard economist, Michael Chernew. In another Health Affairs study, Chernew and his co-authors tried to isolate the effects of changes in insurance benefit design (more cost sharing in less generous employer-sponsored coverage) from other factors behind a slowdown in the rate of growth in health spending from 2007 to 2011. Chernew et al concluded that those changes accounted for about one-fifth of the slowdown in spending growth. However, the evidence for this finding was limited to data from large employers. Those firms have been more aggressive than other businesses in increasing cost sharing for their employees. Moreover, they still represent only a fraction of the overall national health spending totals.

Chernew and his colleagues also find that other factors besides benefits generosity (such as a slower rate of introduction of new health technology) may have been at work in the spending growth slowdown. for this group of health care payers. However, their cautious optimism that the broader spending slowdown may persist seems to be more speculative, given the actual scope of what this particular study analyzed.

If the above mixed bag of muddled econometric analysis is the best we can muster, it might be time to return to the older guidance of Occam's razor for problem solving, which suggests that among competing hypotheses, the one with the fewest assumptions should be selected. To update the wisdom of Calvin Coolidge, when people lose their jobs, lower health spending (not just more unemployment) results.

By starting with the simplest available theory for the time being, we then might conclude several other things.

· In experts' explanations of past health spending factors, not even their hindsight is 20-20.

· When people have less money to spend (see Great Recession), it even will affect their levels of health spending. Eventually, they need to buy other goods and services, too.

· The mix of health care payers shifted over the last decade, toward lower-paying government programs offering a greater share of coverage (see Medicaid enrollment growth)

· Health care providers eventually will adapt to any changes in their payment habitat.

· Obamacare advocates tend to start with an overall political conclusion, and then work backwards to shape evidence to support it. Evidence that "this time is different" remains unsubstantiated as we await the effects of the ACA.

· The Obama administration's flawed economic policies did slow down health spending. But bleeding the economy more won't cure a sick health care system.

· Expect to be surprised again, by future rounds of health spending projections vs. actual results.


Mr. Miller is a resident fellow at the American Enterprise Institute, and the co-author of Why ObamaCare Is Wrong for America.

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