Acceleration Is Forecast for Spending on Health

By Eduardo Porter
The New York Times, April 22, 2014

The Affordable Care Act may well be on track to meeting its primary goal of providing coverage for most uninsured Americans and protecting everyone against the risk of losing their insurance. But for all its innovative proposals to flush waste out of the system, reining in health care spending still appears well beyond the grasp of Obamacare.

“We have been consistently bending the cost curve over the last 20 years, but the kinds of things that we do don’t tend to be permanent,” said Charles Roehrig, who runs the Center for Sustainable Health Spending at the Altarum Institute, a nonprofit based in Washington. “It will take a lot of work just to stay on the same curve we have been on for a while.”

The evolution of the American medical-industrial complex has been driven by two critical dynamics. The first is the development of new technologies. The second is our willingness to pay for them.

Most health care economists agree that the Affordable Care Act, along with other forces, will help reduce waste, pushing the industry to drop the “fee for service” model that encourages doctors and hospitals to spend more whether it is useful or not.

Last November, President Obama’s Council of Economic Advisers issued a hopeful analysis, which posited that structural changes flowing from the act were helping push the growth in health care spending to its slowest on record.

David Cutler of Harvard points to studies that suggest that straightforward changes, such as improving the dismal management of American hospitals, could cut health care costs by 25 to 50 percent. “Getting better is not rocket science,” he said.

But that optimism might be premature. Mr. Roehrig argues that the decade-long slowdown in spending growth reflects a response to the two recessions that provided the economic bookends to the first decade of the new century; not a fundamental shift in the way the system operates.

During that period, employers pushed workers to take insurance with higher out-of-pocket payments, which discouraged use. Medicaid in financially troubled states has cut provider fees and limited access to high-cost services. And, of course, many unemployed workers who lost their company health insurance cut back on visits to the doctor.

These effects, Mr. Roehrig noted, have by now mostly petered out. As the economy recovers, spending growth will resume its climb, reinforced even more by the understandable demands from the eight million newly insured Americans under the health law for services they couldn’t afford previously. He forecasts that health spending will grow substantially faster than G.D.P. in the near future, but expects the gap to shrink gradually to below one percentage point over time. In the long run, he projects that health care spending could consume 30 percent of G.D.P.

Mark McClellan, a former administrator for the Centers on Medicare and Medicaid Services under George W. Bush, and Alice Rivlin, a former vice chairwoman of the Federal Reserve, point out that innovations that improve health or reduce the cost of medical services may also increase demand.

“It would be a mistake to assume that slow growth in health care spending will continue,” they wrote, “or that spending reflects high-value care and therefore, health care delivery reform is no longer an urgent priority.”

Over the last 40 years or so, health care spending has been growing 2.4 percentage points faster than the economy, on average.

But that slowdown still isn’t good enough. By 2032, health care will consume almost a quarter of the nation’s economic production, taking an even bigger bite from workers’ wages and either forcing taxes up to pay the government’s share, adding more to the national debt, or squeezing other important public services.

So, if Americans really want to win the health care spending war, it may take more than reform. It may still take a revolution.…

There has been much speculation about the causes of the recent slowdown in health care spending, but, more importantly, about whether the more recent uptick indicates a return to greater health care inflation and, even more importantly, whether new innovations – especially those in the Affordable Care Act (ACA) will be capable of slowing the increases in spending.

Nobody can reliably predict the future. But the policy community can take a careful look at the facts we do have on hand and make decisions that would improve the odds of achieving a goal of more efficient spending in health care.

Almost every article supportive of the cost containment measures in ACA mentions vague concepts such as no longer paying for volume in health care services but paying for quality instead. If they make an attempt to explain how we might do that, they often invoke accountable care organizations, which, at best, seem to be more loosely designed managed care organizations that so far have failed the tests of greater efficiency and higher quality, other than a few reports of positive but negligible impacts that could never “bend the cost curve” nor truly improve quality.

What we do know is that our administrative waste is profound and that the excesses are readily recoverable – a crucial point that was omitted from this and most other current articles on the causes of our high health care costs. A single payer system would have a major impact on reducing waste in health care spending. We also know that health care prices in the United States are outrageous, and public administration through a single payer system would bring prices down to a level that pays legitimate costs plus fair margins.

We do know that there are excesses in high tech medicine. Again, a single payer system could use objective data, such as comparative effectiveness studies, to make decisions on eliminating payment for useless or harmful services. Also, capital planning can reduce excess capacity which would ameliorate its supply side-driven overutilization. The savings may be offset by improving access to beneficial services for underserved populations, but that spending would increase the overall quality of care provided by the health care delivery system – quality meaning getting the right care to the right people at the right time.

So, as far as predicting health care cost containment in the future we know that a single payer system would have a dramatic effect. But we can also predict quite reliably that dinking around with the meager wish-list policies of ACA will only distract us from moving forward with single payer policies that would really work.

Eduardo Porter writes that it may take a revolution to win the health care spending war. The battle would be between the American people and the economic elite that drive policy (Gilens and Page) and concentrate wealth (Piketty). Obviously non-violent civil action through the democratic process would be vastly preferable to a violent coup, but people are going to have to get off their duffs and initiate citizen action.