The Slowdown in Health Care Costs: Is it Real?

March 11, 2013

On February 5, 2013, Congressional Budget Office (CBO) director Douglas Elmendorf testified before Congress on the CBO’s budget outlook for 2013-2023. As reported in the New York Times and elsewhere, the health care outlook was remarkable: projected Medicare and Medicaid spending for 2020 was down 15 percent over projections made three years ago.

Specifically, the CBO noted “net outlays for Medicare… grew by 3 percent… in 2012—a slower rate of growth than any recorded since 2000.” And, “the CBO’s current baseline also shows lower spending per person in the Medicaid program than was shown in August, primarily because of adjustments to account for the slowed growth in Medicaid spending…For Medicare, CBO has reduced its 10-year projections of outlays for Medicare by $137 billion…the third consecutive year in which spending was significantly lower than CBO had projected.”

In a February 2013 spending brief, our colleagues at Altarum noted these trends were applicable to health care spending across the board, not limited to Medicare and Medicaid. National health expenditures grew at only 4.3 percent in 2012, slightly higher than the past couple of years but much lower than historical trends.

Many analysts question whether this moderation in spending is a trend or a temporary outcome of recent, unique events. Some have compared the current situation to the 1990s, when a dramatic slowdown in health care spending lasted only a few years. Some members of the media questioned the accuracy of President Obama’s State of the Union comments crediting the Affordable Care Act (in part) for these trends. Indeed, many explanations for the current slowdown do focus on the impact of the recession.

So, is the current slowdown a similar situation to what happened in the 1990s, or not? While the answer to that question won’t become clear for some time, I believe what we are seeing now is quite different from what we saw then. I think the President may have more truth on his side than the media credits.

Most analysts believe what happened in the 1990s was the result of changes in health care financing. Specifically, over a several year period, employers shifted from indemnity health insurance plans to managed care. This meant much of the care priced at “charges” began to be paid at lower, contracted rates. While that change was substantive and good, it did nothing to address the underlying fundamentals of health care delivery. The savings were one-time, and once those costs were wrung out of the system, the upward trend resumed.

Today, the health care delivery system is engaged in whole-scale change and restructuring. While some of this change predated the Affordable Care Act, much has been sparked by it.

Three years ago providers, health plans, and others started anticipating changes coming with the Affordable Care Act by gearing up for affordable care organizations, patient centered medical homes, bundled payments, readmission payment reductions, and value-based purchasing. The scope of change occurring now in the health care delivery system is stunning.

So, the President and the Affordable Care Act can take some bows.

But, more importantly, we all have reason to be optimistic about the changes we are witnessing today are are not one-time phenomena. The actions health systems and health plans are taking is exciting: we are seeing things now that we simply haven’t seen before.