Economics, Entitlements

Is health spending really flattening out?

The New York Times reports that health spending may be flattening out, something that has surprised the experts. This apparent slow-down was spotted by AEI’s J.D. Kleinke in February. But if this trend is genuine, the best hope for its continuation would be to repeal and replace Obamacare.

First, this slow-down is hardly new news. In its most recent figures reported in January, the Centers for Medicare and Medicaid Services found that health spending as a share of the economy in 2010 was identical to its share in 2009: 17.9 percent. This is encouraging, except that: a) in July 2011 CMS had already projected that the health share of GDP would be identical in 2009 and 2010; and b) last July CMS thought the share would be only 17.6 percent in both years, not 17.9 percent. Unfortunately, the actual percentage turned out to be higher both because actual per capita health spending in 2010 was slightly higher than CMS originally projected last summer and because actual GDP was lower. In short, things turned out worse than expected both on the health spending front and GDP front. In light of last year’s overly optimistic view of where health spending was headed, caution is in order.

More importantly, this apparent slow-down will merely be the lull before the storm if the Affordable Care Act is fully implemented. As I pointed out last summer, the best single metric for measuring our rate of health spending is to focus on how much of GDP growth is accounted for (or absorbed by) health expenditures. Raw comparisons of health spending growth over time can be highly misleading since changes in health spending are highly correlated with growth in the economy. Thus, hearing that “total health spending grew at less than 4 percent per year, the slowest annual pace in more than five decades” sounds far less impressive if you know how abysmally the economy also grew during the same period. My concern is that even using the overly optimistic projections of CMS, the health spending share of GDP will be rising over the last half of this decade as all the pieces of the Affordable Care Act are put into place.

It is true that the health spending share of GDP growth was much lower in 2010 compared to 2008. But as you can see, it is not at all unusual for health spending to absorb an out-sized share of economic growth during periods of economic slow-down. Even though growth in the economy was far more anemic in 2010 than anyone would have liked, we nevertheless technically were out of the recession by June, 2009 according to the official scorekeepers at NBER. But going forward, the health share of GDP growth is projected to be higher than in 2010 for every single remaining year of this decade. It is important to recognize these are optimistic projections. They assume Medicare will cut physician payment rates by more than 31 percent next January when the current “doc fix” has expired. But even the most recent Medicare Trustees report concedes “it is a virtual certainty” this will not happen. Thus, reality is likely to be much worse than the rosy scenario depicted in my figure.

Even leaving aside expert forecasts, there are substantive reasons to believe the Affordable Care Act might snuff out rather than fuel a slow-down in health spending growth. First, there has been a surge in the share of employees enrolled in high-deductible health plans (13% in 2011 vs. 3% in 2006). But Obamacare is biased against such plans and is likely to discourage their future growth. Second, much has been made of the potential for accountable care organizations (explicitly encouraged under Obamacare) to control costs. But such assessments have failed to consider the “dark side” of ACOs, thoroughly documented by AEI’s Scott Gottlieb, that ACOs likely will become local monopolies that both discourage innovation and increase market power to raise prices. Neither prospect bodes well for bending the cost curve.

Some will say it is unfair for me to focus on the cost-increasing effects of Obamacare as coverage is expanded in its initial years. Allegedly, the real potential of Obamacare lies in its ability to control costs over the long run. Unfortunately, official government agencies have cast considerable doubt on the original promise of Obamacare to bend the cost curve. For example, the official CBO score for the final bill passed by Congress in March 2010 explicitly acknowledged that ACA would “put into effect a number of policies that might be difficult to sustain over a long period of time,” including payment reductions to physicians and other providers, as well as savings required from the Independent Payment Advisory Board (IPAB). The Medicare actuary likewise has explicitly conceded that the long-term savings projected for Medicare “may be unrealistic.” Given Congress’s own track record of repeatedly overriding statutorily required physician payment cuts, why should anyone believe they will not repeat this behavior when it comes to the aggressive payment cuts required under Obamacare? Even Medicare’s own actuary has stated these “are unlikely to be sustainable on a permanent annual basis.” Why? Roughly 15 percent of Medicare Part A providers (hospitals, skilled nursing facilities, home health agencies, and hospice providers) would become unprofitable within the first decade if the Obamacare productivity adjustments were adopted as scheduled by law. By 2065, these rules would result in Medicare and Medicaid payments for hospital inpatient services falling to 60 percent below the amounts paid by private health insurers! This prospect is so unlikely that the most recent Medicare Trustees report includes an alternative fiscal scenario that excludes such provisions. The bottom line? Medicare’s share of GDP in 2085 under the alternative fiscal scenario (10.4%) will be more than 50 percent larger than it would be were Obamacare massive cost-cutting adopted (6.7%). If that news does not seem bad enough, consider this: even under current law, Medicare’s fiscal situation has worsened considerably since last year’s Trustee report. Over the next 75 years, the fiscal shortfall (the mismatch between spending and payroll tax revenues) in Medicare Part A is now 70 percent higher than it was just a year ago. Under the alternative fiscal scenario, that shortfall would be even larger.

It would be wonderful news if we really were bending the cost curve in healthcare. But the available evidence suggests that Obamacare has in no way bent the cost curve even for Medicare. Instead, it is likely to make the burden of health spending even larger with each passing decade. The fastest path getting health spending under control would be to repeal Obamacare and replace it with a more sensible patient-centered approach to health reform.

Christopher J. Conover is a research scholar at Duke University’s Center for Health Policy and Inequalities Research, an adjunct scholar at AEI, and affiliated senior scholar at the Mercatus Center at George Mason University. His new book, American Health Economy Illustrated, was released in February 2012 by AEI Press. See PowerPoint version of Figure 1.3e and Excel spreadsheet containing trends in health spending as a share of GDP and GDP growth from 1929-2020 for data, sources and methods.

2 thoughts on “Is health spending really flattening out?

  1. The 2012 Trustee’s Report projects the exhaustion of Medicare’s trust fund in 2024. After the trust is exhausted, Medicare will only be able to pay out a percentage of total benefits (http://1.usa.gov/Kg5KuF).

    Clearly entitlement reform is needed.

    • Yes, more specifically, from the Trustees’ report that you cite: “The HI 75-year actuarial imbalance amounts to 36 percent of tax receipts or 26 percent of program cost.” This implies that either the payroll tax has to be increased by 36 percent or program costs cut 26 percent to achieve fiscal balance.

      One of the biggest design flaws in Obamacare is that it diverted $500 billion in badly needed resources AWAY from Medicare to finance a new entitlement. As the CMS actuary and CBO director have said repeatedly, those resources cannot be spent twice. By law/convention, the Trustees report assumes the $500 billion in cuts/new revenues are used to shore up Medicare, yet we STILL have a serious fiscal imbalance. But if instead those same resources are used to finance the expansion of Medicaid, Exchange subsidies and other pieces of Obamacare, then Medicare’s fiscal plight will be far, far worse. This is the point that Charles Blahous, one of Medicare’s public trustees, has been making recently. http://mercatus.org/publication/fiscal-consequences-affordable-care-act.

      For an administration allegedly dedicated to transparency, this “smoke and mirrors” approach to health policy is the antithesis of open and honest governance.

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