Lab Soft News: Decrease in Healthcare Costs May Persist as Economy Revives

One of the biggest challenges facing our economy is the cost of healthcare which has been rising for years as a percentage of GDP. Recently, however, health spending has been decreasing. There has been much speculation as to whether this slowdown is transient or lasting. A recent article addressed this topic (see: Slowdown in Health Costs’ Rise May Last as Economy Revives). Below is an excerpt from it:

One of the economic mysteries of the last few years has been the bigger-than-expected slowdown in health spending, a trend that promises to bolster wages and help close the wide federal deficit over the long term — but only if it persists. Major new studies...have concurred that at least some of the slowdown is unrelated to the recession, and might persist as the economy recovers. David M. Cutler...estimates that, given the dynamics of the slowdown, economists might be overestimating public health spending over the next decade by as much as $770 billion. Between 2009 and 2011, total health spending grew at the lowest annual pace in the last five decades, at just 3.9 percent a year, although rising out-of-pocket costs have hit millions of families. In contrast, between 2000 and 2007, those annual growth figures ranged between 6.2 and 9.7 percent, according to government figures. Data from the Altarum Institute... suggests that the low pace of growth has continued through 2012 and early 2013.

The studies...shed new light on the precise mix of factors that have led to the flattening-out. Economists concur that the deep recession and sluggish recovery are the main reasons for slowing growth in spending. During the recession, millions of Americans lost their jobs, and thus their insurance coverage; millions more struggling families were reluctant to see a physician or undergo a procedure. But the slowdown in health costs proved steeper than forecast. It also occurred in populations whose health spending was mostly sheltered from the economic gyrations, like Medicare patients. That led economists to surmise that other factors were at play. In new research, the Kaiser Family Foundation estimated that the recession accounted for about three-quarters of the lower spending trajectory, with the rest attributed to other factors not directly related to the economy....

Among other factors [contributing to the decline], the studies found that rising out-of-pocket payments had played a major role in the decline. The proportion of workers with employer-sponsored health insurance enrolled in a plan that required a deductible climbed to about three-quarters in 2012 from about half in 2006...Moreover, those deductibles — the amount a person needs to pay before insurance steps in to cover claims — have risen sharply. That exposes workers to a larger share of their own health costs, and generally forces them to spend less.

For many years, there has been speculation that exposing healthcare consumers to the true cost of care will cause them to be smarter shoppers. Here's the key quote for me from the article above: [Rising insurance deductibles] exposes workers to a larger share of their own health costs, and generally forces them to spend less. If demand for services continues to decline, providers, exposed to more competitive pressures, will theoretically begin to lower their prices for services. All of this is going to hurt healthcare consumers in the U.S. who are generally used to a high quality and abundant services and will squeal when their choices become more limited. However and as noted above, the cost of healthcare in the country is not sustainable in the long run. Here's another article on this same topic: Brakes on U.S. health spending go beyond the recession -studies.