Brakes on U.S. Health Spending Go Beyond the Recession

07.05.2013 -

Slower growth in the pace of U.S. healthcare spending reflects a fundamental change in the use of medical services that could save the country nearly $800 billion in the next decade, according to two new studies released on Monday.

The research, published in the journal Health Affairs, disputes the claim that a slowdown in the rise of spending in the last few years was mostly due to a weak economy and high jobless rate that forced many Americans to cut back on trips to the doctor, use of medications and elective surgeries.

Instead, the studies conclude, everything from consumer price shopping to patent expirations on brand name drugs is transforming the world's most expensive healthcare system in ways that will constrain costs for years to come.

If their argument proves correct, the Medicare health plan for the elderly could pay out $401 billion less in 2021 than government actuaries have projected, one of the studies calculates, while total spending over the period from 2013 to 2022 would be $770 billion less.

That would reduce the pressure to make draconian changes such as raising the Medicare-eligibility age and could provide a boost to President Barack Obama's healthcare overhaul.

"It's not an overstatement to say that if we solve the healthcare spending problem we solve the federal deficit," said health economist Martin Gaynor of Carnegie Mellon University, who was not involved in the new research.

Early in the last decade, healthcare spending increased 5.7% annually. But from 2010 to 2012, it rose only 0.9% a year.

The recession and continued unemployment, causing job-related insurance loss and strained finances, did keep people from going to doctors, filling prescriptions and undergoing elective surgery, according to economists David Cutler and Nikhil Sanhi of Harvard University.

But those one-off changes accounted for only 37% of the slowdown between 2003 and 2012, they report in Health Affairs. A decline in private insurance coverage and cuts to some Medicare payment rates accounted for a bit more.

What the economists call "a host of fundamental changes" drove the majority of the spending slowdown. Among them: fewer expensive new imaging technologies, fewer pricey new drugs and the expiration of patents on many expensive ones, patients shouldering more of the cost of care through high-deductible insurance plans, and greater efficiency by doctors and hospitals.

There are hopeful signs that might continue. Medications accounting for one-sixth of spending on prescription drugs will lose patent protection in the next five years, opening the door to cheaper generics. And more surgeries are being done on an outpatient basis, which is cheaper than a hospital stay, a trend also likely to persist.

David Cordani, president and chief executive of health insurance giant Cigna, told the Reuters Health Summit on Monday that another force is at work: patients can find out where to get a $500 MRI for a battered knee rather than an identical $3,000 one, and higher-deductible insurance policies give them an incentive to seek out the $500 one.

"I believe consumer-directed plans and this information transparency are the largest drivers" of moderating healthcare spending, Cordani said. "Whether or not it's a new normal, I don't know."

Higher deductibles and co-pays

More patients have a financial incentive to find the $500 MRI: since 2006, 24% more workers have insurance policies with a deductible greater than $1,000 for an individual, Cutler and Sanhi report. Co-payments for doctor visits have also risen: 47% of plans have a co-pay greater than $25 for primary care, up from 20% in 2006.

Partly as a result of cost shifting to patients, physician visits fell 17% from spring of 2009 through the spring of 2011. There is a limit to how few doctor visits people can have, but experts suspect we are nowhere near that yet.

"When people are first exposed to the cost of medical services" through higher co-pays and the like, "they're a little bit like deer in the headlights," said Mike Thompson of PriceWaterhouseCoopers. "But over time they get better at choosing services," which suggests the slowdown in healthcare spending increases will continue.

The brakes are also being applied by providers cutting waste and reducing hospital errors, infections and re-admissions, he said. Hospital-acquired illness and avoidable readmissions account for 5% of U.S. healthcare spending.

"It's an uphill fight to change the supply side in a fee-for-service healthcare system," Thompson said, "but I think we're only in the infancy of these efforts," which means there is more room for reining in spending.

The conclusion that the recession explains 37% of the slowdown in healthcare spending is at odds with a study released last month, which attributes 77% of the reduced growth in healthcare spending to the economy.

"But we're in agreement that the economy is not the only factor in the historic slowdown in spending," said Larry Levitt of the Kaiser Family Foundation, who led that study. "It's difficult to pinpoint the precise reasons" for the brake on spending growth, "but we clearly have made changes in the health system that are keeping costs down."

In a second study in Health Affairs, researchers conclude that both the recession and higher deductibles explain only some of the moderation in medical spending.

"What I personally believe is that there has been something of a change in the culture of providers, with doctors becoming more cost-conscious," said Michael Chernew, professor of healthcare policy at Harvard Medical School, who led the study.

That might be reflected in the campaign by medical specialty groups to urge their members to cut back on tests and procedures that do not benefit patients. It is too soon, however, to know if this "Choosing Wisely" campaign, which began last year, is affecting how doctors practice.