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Study Finds Recent Slowdown in Health Spending Growth Mostly Tied to the Economy

Growth Expected To Move Towards Historical Levels In Coming Years As the Economy Recovers

A new Kaiser Family Foundation analysis of how the economy affects the nation’s health spending concludes that the record slow growth rate of recent years stems largely from economic factors beyond the health system, with the economy explaining 77 percent of the slowdown, and more rapid growth expected in coming years if the economy strengthens as expected.

Based on statistical modeling and analysis by health cost experts at the Foundation and Altarum Institute’s Center for Sustainable Health Spending, the analysis assesses how much the economy is driving the nation’s recent slowdown in national health spending, a category encompassing what individuals, employers and governments collectively spend.

Government statistics show that health spending grew by 3.9 percent each year from 2009 to 2011 — the slowest growth since the government began tracking it in 1960. Estimates suggest that slow growth in health spending continued into 2012. On average, health spending grew by 4.2 percent per year from 2008 to 2012, down from the recent peak of 8.8 percent from 2001 to 2003.

Based on statistical analysis of 50 years of health spending and economic trends, the study finds that the economy, including factors such as Gross Domestic Product growth and inflation, produces a major but delayed effect on the nation’s health spending. This effect stretches over a period of six years, meaning that the recession that ended in 2009 will continue to dampen health care spending for several more years and that spending will increase gradually as the economy strengthens.

Economic factors alone account for 77 percent of the reduced growth in national health spending from its 8.8 percent peak in 2001 to 2003. The remaining 23 percent result from changes in the health care system, potentially including higher deductibles and other cost-sharing that dampen patients’ use of services, as well as various forms of managed care and delivery system changes. This study cannot determine the separate impact of these factors.

“The problem of health costs is not solved and we need to be realistic that health spending increases will return to more typical levels as the economy improves,” Foundation President and CEO Drew E. Altman said. “But the analysis also shows that the economy is not the entire story, and if we could shave even a percentage point or more off annual health care spending increases, we could save trillions of dollars over the next decade.”

A related column, authored by the Foundation’s Drew Altman and Larry Levitt, appears in today’s Washington Post.

Though the recession will likely continue to dampen health spending growth over the next couple of years, the study projects that expected economic growth will drive up health spending in years ahead — gradually adding 3.5 percentage points to the annual growth rate by 2019. This would push the annual growth rate in health spending back over 7 percent, which is much closer to historical averages.

The economy can have a direct effect on health spending, such as consumers using fewer health care services as their incomes lag, as well as an indirect effect — for example, employers raising deductibles or fewer people working and more people uninsured during economic downturns. The effect is not immediate because individuals, employers, and governments do not always respond quickly to economic changes or may cut other expenses before health.

A number of factors could alter the rate of increase in health spending in the years ahead and are not explicitly accounted for in the study. The Affordable Care Act will likely produce a modest one-time increase in health spending as more people gain insurance coverage through health insurance exchanges and broader eligibility for Medicaid. The ACA is also expected to generate substantial savings in Medicare through smaller increases in payments to providers and insurers. Other ACA provisions could also reduce costs. In addition, new delivery models being developed in the public and private sectors, as well as higher deductibles in private insurance plans, could dampen future cost growth.

With national health expenditures totaling about $2.8 trillion in 2012, trimming anticipated growth by even a single percentage point could reduce spending by more than $2 trillion over the course of a decade, with big implications for government, private-sector and family budgets.

The study, Assessing the Effects of the Economy on the Recent Slowdown in Health Spending, is based on statistically modeling using economy data and national health care expenditures data from actuaries at the Centers for Medicare and Medicaid Services through 2011, and from the Center for Sustainable Health Spending at the Altarum Institute for 2012. The study was prepared by researchers at the Kaiser Family Foundation, including Larry Levitt and Gary Claxton; Charles Roehrig of Altarum Institute; and Thomas Getzen of the Fox School of Business at Temple University. Altarum Institute’s monthly health indicator briefs are available at www.altarum.org/HealthIndicators.

The Kaiser Family Foundation, a leader in health policy analysis, health journalism and communication, is dedicated to filling the need for trusted, independent information on the major health issues facing our nation and its people. The Foundation is a non-profit private operating foundation, based in Menlo Park, California.