Healthcare spending projections may overstate next-decade spending by $770B

To paraphrase Mark Twain, the reports of out-of-control healthcare spending growth are greatly exaggerated. That’s the conclusion reached by an analysis of financial trends published in the May issue of Health Affairs that found public healthcare spending over the next decade could be as much as $770 billion less than predicted.

Authors David M. Cutler, PhD, and Nikhil R. Sahni, both from the department of economics at Harvard University in Boston, explained that spending growth fell in the late 2000s, but the usual suspects blamed for the slowdown—the recession, Medicare rate changes and a shuffling payer mix—don’t capture the whole picture.

“Although the data were not definitive, we found the argument for a structural change in the health care system contributing to the slowdown in spending growth at least as compelling as the argument rooted in an economic cycle,” wrote the authors.

Projections based on the assumption that the recession was the main drag on healthcare spending are then likely to predict a surge in expenditures as the economy improves, a surge that may not materialize as Cutler and Sahni pointed out.

From 2001-2003, real per capita healthcare spending increases were as high as 5.7 percent, according to the authors. This fell to 0.9 percent in 2010.

To determine how the recession played into this slowdown, Cutler and Sahni related annual real per capita overall healthcare spending changes from 1970 through 2012 to the average growth rate for the economy over the preceding few years. Using this methodology, they determined that the recession could only represent 37 percent of the overall healthcare spending slowdown.

However, prominent projections from the Centers for Medicare and Medicaid Services (CMS) Office of the Actuary and the Congressional Budget Office attribute more of the slowdown to economic factors. Their forecasts for Medicare spending operate under the assumption that lingering economic troubles will limit healthcare spending growth through 2018, but growth will return to historical trends thereafter.

“If health care spending growth remains at its current low level, the official forecast will significantly overstate spending in the latter years of this decade,” wrote Cutler and Sahni. They pegged the CMS actuarial forecasts for 2021 as overestimating by 14 percent, amounting to $770 billion in public healthcare spending over the next decade that would not occur if current slow growth rates persist.

Medicare payment rate changes and shifts in the number of people moving from private coverage to Medicaid (or losing coverage entirely) only account for 5 percent and 3 percent of the spending slowdown, respectively, according to the authors.

Pinning down what makes up for the other 55 percent of the spending slowdown is difficult, but Cutler and Sahni offered a few explanations. Imaging figures prominently here, as MRI and CT utilization grew rapidly through 2005, but then tailed off. Likewise, pharmaceuticals experienced slower spending growth as a number of drugs came off patent and fewer blockbusters were released.

Cost sharing and copayments also increased over the past decade, reducing public spending, according to the authors. The proportion of covered workers with a deductible greater than $1,000 for single coverage has increased 24 percentage points since 2006, while copayments for primary care provider visits had an annual increase of 1.9 percent from 2006 to 2012.

Provider efficiency also may play a large role in explaining the slowdown. Readmission rates in Medicare decreased more than one percentage point in 2012, and the authors pointed out some particularly impressive examples of efficiency gains. The University of Pittsburgh Medical Center cut hospital-acquired infection rates by 85 percent since 2001, and Dallas-based Parkland Hospital reduced Medicare heart failure readmissions by 40 percent from 2010-2011.

Whatever the causes, an extended slowdown in healthcare spending growth would have a huge impact on businesses and households, wrote Cutler and Sahni. “Under the alternative forecasts, spending by businesses in 2021 would be $92–$430 per covered worker per year less than currently expected, and out-of-pocket spending per household per year would be about $62–$290 lower. Slow health care spending growth might thus bring much-needed relief throughout the economy.”