Economics, Health Care, Pethokoukis

Is the weak US economy fixing America’s health care cost problem?

Image Credit: Shutterstock

Image Credit: Shutterstock

US health care reform expands insurance coverage, but more reform is needed to control spending. Yet even as politicians and policy wonks continue to cook up cost-control schemes, the anemic economy may be doing the heavy lifting for them. But not in the way you might guess.

A new study from Harvard economists David Cutler and Nikhil Sahni finds national health spending between 2003 and 2012 was nearly 16%, or $514 billion, below US government forecasts. The researchers attribute 37% of the unexpected spending slowdown to the Great Recession, with a decline in private insurance coverage and lower Medicare payment rates accounting for another 8%. As for the rest, Cutler and Sahni attribute 55% to a combination of structural changes, “including less rapid development of imaging technology and new pharmaceuticals, increased patient cost sharing, and greater provider efficiency.”

You could sum up many of these structural changes as different sorts of innovation. The paper outlines a number of widespread efficiency savings over the past decade from improvements such as reduced bloodstream infections and lower Medicare readmission rates. Health insurance plans became more diverse, giving consumers more choice such as health savings accounts. Cutler and Sahni point to changes in cost sharing — higher deductibles and copayments — as likely additional factors slowing spending.

And while the economists think technological stagnation played a role, too, they’re not so sure. They also speculate that perhaps improvements in digital technology and image sharing have decreased the need for re-imaging. Other economists have cited the IT and networking revolution as improving disease management.

Perhaps a decade of subpar growth has helped control costs less by limiting what consumers and business have to spend but than forcing industry to get smarter. The Great Depression 1930s, for instance, saw huge increases in innovation and productivity.  As economist Alexander Field has put it, “There is evidence that for some organizations and industries, just as for some individuals, adversity summons reservoirs of initiative and creativity that have long-term positive consequences.”

If trends continues, public-sector health care spending would be as much as $770 billion less than predicted. Already, government budget scorekeepers have been plugging lower health inflation into their forecasts. But would another economic surprise, in this an acceleration in GDO growth — make hash of these news predictions? History suggests higher spending growth will return, though much depends on the impact of the Affordable Care Act. We better hope the innovation continues.

2 thoughts on “Is the weak US economy fixing America’s health care cost problem?

  1. re: finds national health spending .. below US government forecasts”

    Total spending dropped.. but healthcare inflation has been proceeding on the same trend it has been, so I suspect they underestimate the impact of the recession. (graph from the Fed graph site on the site linked later):

    re: “health savings accounts”.

    Unfortunately Obamacare will restrict maximum deductibles, and its MLR rules may further inspire companies to drop HSA policies or make them less useful. It is likely Obamacare will lead prices to start rising faster, and that much of the lull in growth was due to the slower economy.

    re: “We better hope the innovation continues.”

    The problem is there are many reasons to expect it won’t due to Obamacare, e.g. the medical device tax driving away entrepreneurs as is in general the threat of government regulation. Yes, there are entrepreneurs in healthcare since there is a lot of money, but there would be far more if they weren’t scared off by the unpredictable potential for future regulation putting them out of business or at least forcing major product changes.

    Links and far more on why healthcare costs rise, and Obamacare will likely make things worse, here:

    which talks about the myriad favors to special interest groups involved. We often “preach to the choir” regarding free market approaches to healthcare, we need to instead focus on what liberals fear: corporate influence over government, and explain how it is responsible for most of the healthcare mess (including much of Obamacare).

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