Rise in Health Care Spending Down, But Not Out

Rise in Health Care Spending Down, But Not Out

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Don’t take too much solace from news that health care spending in 2009 rose at its slowest pace of the past 50 years. Economists at the Centers for Medicare and Medicaid Services said Wednesday that the slowdown was largely due to consumers decreasing their use of health care services after losing their jobs with insurance or seeing their incomes decline.

Clearly, any program to reduce health care spending that relies on a 10 percent unemployment rate  isn’t sustainable. It may even be creating a large backlog of unmet medical need, especially in postponable areas like dental and preventive care, which could explode once people return to work or obtain coverage. Here are a few other ways to look at the 4 percent growth rate in 2009, which was down from 4.4 percent in 2008 and is well below the 7 percent-plus average during the earlier part of the decade. According to the data prepared by economists at the Centers for Medicare and Medicaid Services:

• In a year when the rest of the economy actually shrank and inflation was around 1 percent, health care still managed to grow at four times the rate of inflation. Health care now consumes a staggering 17.6 percent of overall gross domestic product, a full percentage point higher than the year before. That’s the biggest one-year surge ever in its share of economic activity.

• Most of the slower growth can be attributed to people using fewer services, either because they became unemployed and lost insurance or because they were trying to save money by reducing their co-payments.

• Despite a slower increase in demand, prices rose. Drug manufacturers led the way by raising prices by 3.4 percent in 2009 compared to 2.5 percent the previous year before the recession hit. The increasing use of generic drugs was offset by sharp increases in the price of brand name pharmaceuticals.

• As people lost their jobs and health insurance, private insurance payments rose by a scant 1.3 percent. The federal government got left with the tab. Federal spending for Medicare rose 7.9 percent in 2009, the same as the previous year, while federal spending on Medicaid rose 22 percent, up from 8.7 percent the previous year.

• Federal spending on all health care programs – which includes the Department of Defense and the Veterans Administration in addition to picking up the tab for seniors and the poor – took a staggering 54 percent of all federal income in 2009, up from 38 percent in 2008.

• Meanwhile, state and local spending fell 9.8 percent as the Obama administration’s stimulus act, passed in February 2009, picked up a greater share of the tab for the poor and unemployed. That goes away in June.

As the above numbers suggest, 2009 was an anomalous year due to the severity of the recession. However, as more people are re-employed and regain private coverage, it’s entirely possible that health care spending will return to its free spending ways.
It’s worth taking a closer look at the last time there was a period of relatively slower growth in health care spending, which was the mid-1990s. Then, as now, the nation was emerging from a recession. Also then, as now, the nation and a new president was embroiled in a national debate over rising health care costs and covering the uninsured. Health care spending’s growth rate fell rapidly from an 11.9 percent increase in 1990 to 7.4 percent in 1993 to a trough of 5.3 percent in 1996.

CMS economists refused to speculate whether the health care debate over Clintoncare had any impact on spending’s declining growth rate. But Anne Martin, the chief economist on the latest study, did point out that the failure of the Clinton health care plan led to a widespread shift by corporate America to managed care insurance plans for their employees.

That succeeded in holding costs in check for a while. But when the ham-handed way in which insurance companies cut costs triggered a “patients’ rights” backlash in the late 1990s, , the upward climb of health care spending resumed.
Is the cycle about to repeat itself? This time, a steep recession followed by a national debate over health care led to a sweeping reform bill. This week or next, that bill will likely be repealed in the House.

That may only be a symbolic vote. But the Republicans in the House are promising to bring up votes every week on various parts of the bill that they find objectionable.

If their targets include low-cost programs like the Center for Medicare Innovation, the Patient Centered Outcomes Research Institute and the Independent Payment Advisory Board, which are the elements of the reform package that were designed to hold long-term Medicare costs in check,  then we may find history repeating itself.

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spent 25 years as a foreign correspondent, economics writer and investigative business reporter for the Chicago Tribune and other publications. He is the author of the 2004 book, The $800 Million Pill: The Truth Behind the Cost of New Drugs.