The Bending of the Health Care Cost Curve

It looks like growth in health care costs is ebbing, but it’s not clear the slowdown is here to stay.

By Ian Morrison

Health care costs are an enormous national issue. We agonize as a nation that we spend way more than most developed countries, that we have public programs that eat federal and state budgets, that our employer-based health care costs undermine our industry’s global competitiveness, and that middle class households haven’t had a wage increase in a couple of decades because of rising health care costs. So it would seem like good news to everyone that growth in health care costs was slowing.

But Is It Sustainable?

Economists all agree that there is evidence of slowing in the rate of growth. For example, in February 2013 the Congressional Budget Office announced that projected Medicare and Medicaid spending in 2020 would be some $200 billion, or 15 percent less than the office had projected only three years ago. In 2012 Medicare spending per beneficiary grew by just 0.4 percent.

Similarly, in the private sector, a recent Towers Watson and National Business Group on Health survey of large employers found that cost growth for active employees was at the lowest rate in 15 years, up only 5.1 percent in 2013.

While economists agree that the trend is bent in the short run, there is much more disagreement about whether these changes are sustainable. I recently had the privilege of moderating a panel on the role of health care in the federal deficit with three of the nation’s top economists who are experts in this area (Alice Rivlin of Brookings, Gail Wilensky of Project Hope, and Paul Ginsburg of the Center for Studying Health Systems Change). While we had lively debate on a number of issues, the consensus was that most economists are unsure whether the trend has truly been bent on a sustainable basis.


Why the Trend Has Slowed … at Least for Now

It is too glib to say “It’s the recession, stupid.” But all economists agree that the Great Recession took a toll on health care spending in direct and indirect ways. Because of loss of jobs, loss of wealth or loss of health insurance, many people were less likely to use health services (particularly those health services that were deemed discretionary), contributing to a slowing in volume.

Medicare cuts started happening as part of the Accountable Care Act (ACA), and many state governments were forced to cut Medicaid reimbursement rates in the recession, contributing to a slowing in reimbursement rates (for public programs).

Small businesses were forced to drop coverage as the recession continued, and millions of Americans lost jobs and health coverage in businesses large and small, causing the uninsured to swell to 50 million at its peak.

But the recession explains only part of the story. Other factors have contributed to the observed decline in the rate of growth:

The big benefit buydown. Quietly over the last decade, large corporations have been on a slow and steady “buydown” of benefits; this is benefit-consulting speak for “shift the financial burden to employees.” Much of this cost sharing has been sold in the guise of consumer empowerment and delivered through the vehicle of consumer-directed health plans, many with health savings accounts.

But research shows that the health savings account part of these plans is not what reduces costs but rather, the high deductible part. As the RAND organization has painstakingly demonstrated in its research, when people have to pay more out of pocket, they use less care (both seemingly necessary care, such as prevention, and potentially unnecessary or discretionary care).

Cost shifting to consumers certainly does reduce cost growth, but it is a blunt instrument. Recent provisions of the ACA place a floor under employer-sponsored plans to have an actuarial value of 60 percent. This means that, in the future, employers cannot cost-shift more than 40 percent of the costs of care to employees.

The benefit buydown also includes the progressive retreat from retiree health benefits to early retirees and post-Medicare-eligible retirees. Similarly, spousal benefits and dependent coverage are also likely to be trimmed back, according to recent surveys of large employers.

Frequency is down. The combined effects of recession and cost shifting to consumers are powerful forces reducing the volume of activity. But what is very interesting is that in all lines of insurance (property and casualty and even malpractice insurance), the frequency of claims is down.

Insurers scratch their heads when they try to explain this, and some believe that because there is an economic cost in time or money of activating insurance, people think twice when economic times are leaner. This phenomenon may explain why utilization is reportedly down in Medicaid plans, even though there is relatively little direct economic friction to utilization through cost sharing. Analysts point to the opportunity cost for low-wage workers of taking time off from work to visit a doctor (even though there may be little or no co-payment involved).

The patent cliff. The pharmaceutical industry has had a rough few years as many of its blockbuster medications came off patent and were exposed to merciless competition from generics. Generic substitution rates are at an all-time high, which explains the amelioration in the drug spending trend for chronic care medications in most health plans. (This is not true for specialty pharmaceuticals, which we will explore below.) A recent Accenture study suggests that the patent-cliff effect peaked in 2012, and the economic benefits to consumers may have peaked along with it.

The impact of Obamacare. Most analysts are pretty skeptical that there is much affordable in the Affordable Care Act, but that judgment may be unfair and hasty. Across the country, health system leaders are exhorting their organizations to “learn to live on a Medicare level of reimbursement.” This is more of an aspiration than a practical plan, because it requires taking 10 percent, 20 percent or maybe even 30 percent of costs out of the system.

Yet “learning to live on Medicare” is a prevalent strategic plank in the operating platform of most large systems. Spurred by the ACA, many systems are embracing this goal and doing the detailed work of improving throughput efficiencies, rationalizing the supply chain, and redesigning clinical processes for higher performance on both cost and quality. If everyone in hospitals is trying to take costs out, then maybe costs get taken out. Just speculating.

The Triple Aim and accountable care. Across the country, hospital leaders and even entire states are embracing some variant of the Triple Aim and committing to manage total costs, population health and the quality of the patient experience. Accountable care organizations (ACOs) may end up saving money. Similarly, many states across the country are discussing, if not fully embracing, efforts such as those in Massachusetts to have health care meet a growth target closer to the gross domestic product growth per capita.

Choosing wisely. Finally, there is a major movement in medicine toward a rediscovery of financial stewardship as part of medical professionalism. This trend is epitomized most notably in the Choosing Wisely campaign that has been embraced by a growing number of medical specialty societies. The reduction of harm and the elimination of waste, done right, may yield economic savings that can be substantial and sustainable.


A New Normal? Or the Empire Strikes Back?

While all these factors argue that we have perhaps reached a new normal of slower health care cost growth, it may be premature to declare victory. Look, we have flat lined temporarily before and bounced back to the trend. In particular, in the mid 1990s when Clinton care was being discussed and managed care was on a roll, cost trends ameliorated significantly, only to bounce back when Hillary’s plan collapsed and restrictive managed care got rolled back because of the consumer backlash.

Around the world, health care spending per capita tends to rise with national income. Economists deem health care a superior good. A society will spend a higher percentage per capita and as a share of the gross national product when national income rises. (This does not let us off the hook, by the way. The United States is an outrageously expensive outlier to this simple generalization.)

There are many reasons to suspect that without continued vigilance the inflationary costs trend may bounce back.

Coverage expansion. Let’s start with the obvious: The ACA aims to expand coverage to more than 30 million uninsured. While they are getting some care today, they are likely to cost more in the future, perhaps 25 percent to 30 percent more per capita for 10 percent of the population, or some 3 percent in an overall increase in total costs per capita. To put that in context, though, that increase is exactly half the rate of annual cost growth in health care, so it could theoretically be absorbed if the trends outlined above are maintained.

Aging. Of more concern is the aging of the population and the increase in the Medicare-eligible population, from 13 percent of the population today to more than 22 percent over the next decade. This will not come cheap as demanding, narcissistic baby boomers demand to have their knees, hips, hearts and maybe even minds fixed over the next 30 years.

Technology. New science will yield new technology. Whether it be personalized genomic medicine, advances in imaging, or transplantation and complex surgery, there are likely to be new and expensive technologies that will be hard for American society to resist.

Two related examples of this are the trend toward personalized medicine and the rise of specialty pharmaceuticals (often termed biologics). The cost of specialty pharmaceuticals has been growing at more than 20 percent per annum for the last decade and now has come to a point where it represents almost 40 percent of total drug spend in some health plans. Most of big pharma’s investment in R&D is targeted toward these complex, large-molecule drugs that are often focused on small populations, with annual cost of therapies in the hundreds of thousands of dollars per patient.

Prices. Much of the recent growth in health care costs has been in price, not volume. Continued massive consolidation in the delivery system concerns, in particular, private purchasers who worry that they will be asked to pay higher prices to compensate for the trend-bending activities of the government.

Robust economic recovery. Much of the slowing of the cost growth in health care can be attributed to the benefit buydown we discussed earlier. Corporate America was able to do that during a recession more effectively than if it was engaged in a war for talent. Remember that? If we see the economy picking up speed, the pressure to provide more generous benefits may cause employers to loosen the purse strings.

Job growth in health care. I was always taught that health care costs equal health care incomes. Judging by the robust growth in the health care sector, costs are not declining any time soon. Health care accounted for almost 300,000 of the 1.9 million new jobs created in the last year (over 15 percent of the total growth). And there are only isolated signs of slowing as part of the learning-to-live-on-Medicare mantra.


So What?

Overall, my judgment (for what it’s worth) is that this slowdown is real and is potentially sustainable if we keep the focus of purchasers (business, government and households) on this issue. I believe we have to slow the growth in health care costs or we will face horrible consequences in the form of unacceptably high tax rates or equally unacceptable economic Darwinism in health care. It is a threat to individual economic security, and in turn national security, through the pernicious effects on the federal deficit.

If sustained even for the next few years, slowing cost growth will create some interesting impacts:

Time for a budget breather? The budget deficits may seem less onerous, and there may be less pressure to act on major Medicare reform, if the Medicare meltdown seems less immediate.

Obamacare coverage expansion may get off the ground. Coverage could be expanded without bankrupting the treasury in the short term, particularly if many states are slow on the uptake of Medicaid expansion and exchange roll-out, postponing the associated federal costs of Medicaid expansion and insurance exchange subsidies.

The one-time sale on a sustainable growth rate fix. My friend and colleague Robert Blendon of Harvard University has pointed to an important opportunity for the Congress presented by the apparent slowdown in costs, namely fixing the sustainable growth rate problem. The deep cuts in payment to physicians under Medicare get waived every year with bipartisan support. Few in Congress want to cut doctors by 30 percent, and even fewer are willing to fix the problem permanently, because the number is too big over a 10-year period. If the cost trend is bent, then the problem becomes cheaper to solve.

But then you say, won’t the projected total costs go up as a result? You can see why this is tricky stuff, can’t you?

Ian Morrison is an author, consultant and futurist based in Menlo Park, Calif. He is also a regular contributor to H&HN Daily and a member of Speakers Express.