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Slowdown in Health Costs’ Rise May Last as Economy Revives

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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 from researchers at Harvard University, the Henry J. Kaiser Family Foundation and elsewhere have concurred that at least some of the slowdown is unrelated to the recession, and might persist as the economy recovers. David M. Cutler, the Harvard health economist and former Obama adviser, 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, a nonprofit research organization in Ann Arbor, Mich., suggests that the low pace of growth has continued through 2012 and early 2013.

The studies — including some released Monday in the journal Health Affairs — 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.

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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. Professor Cutler of Harvard calculates that the recession accounted for about 37 percent.

Among other factors, 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, the Kaiser Family Foundation has found. 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.

Thus, while economists have cheered the flattening in health spending, families have assumed more and more of the health care burden: even if households benefit from the slower growth in health costs in the long term, they might suffer in the short term as their out-of-pocket health costs rise at a painful economic time to begin with.

"The slowdown in health costs is completely unreal to average people," said Drew Altman, the president of the Kaiser Family Foundation. "Experts measure aggregate spending. But people's costs have gone up 140 percent over the past 10 years, while wages only went up 40 percent."

In a new study in Health Affairs, Michael E. Chernew of the Harvard Medical School and his co-authors estimate that rising out-of-pocket payments, like deductibles and copays, account for about 20 percent of the decline in health spending.

Other major factors include lower Medicare payment rates, the less-rapid development of new medical treatments — especially prescription drugs — and changes in the way that insurers pay health care providers. Over the last decade, for instance, hundreds of hospitals and doctors have started to accept "bundled payments" for a course of treatment, rather than charging per procedure. Many health systems have also forged agreements with insurers to move away from fee-for-service medicine, instead writing contracts that compensate them for delivering less, but higher-quality care.

Policy makers in Washington consider that last change to be one of the most promising ones, though economists say they believe it is only just starting to show up in health spending statistics — if at all. "For a few years, it was like what Bob Solow used to say about computers and productivity growth — you could see it everywhere but in the numbers," said Professor Cutler of Harvard.

Forecasters generally expect the low pace of health cost growth to continue through 2013.

But come 2014, the significant expansion of insurance coverage through the Affordable Care Act will start to increase national health spending by hundreds of billions of dollars, although the underlying pace of inflation might remain low. Consolidation among medical providers also might start to push up the pace of cost growth, a more worrisome trend in the long term.

The economic recovery and falling unemployment should lead to higher spending, too. "Some return to higher spending is baked into a stronger economy," said Mr. Altman of the Kaiser Family Foundation. "That's going to be blamed on the A.C.A., and it shouldn't be."

But health economists are hopeful that the dozens of provisions in the Affordable Care Act designed to hold down costs might kick in as other factors fade. "My sense is that it's really gathering speed," Professor Cutler said of changes away from fee-for-service medicine. "Folks were taking tentative steps before the Supreme Court decision came down, but now everybody knows it's locked in and the governors are deciding about the Medicaid expansion. If you're a hospital executive, you're now saying: 'I need to figure out how I'm going to adjust to this.' "

Over the long term, a reduction in health inflation could be a boon for both families and the federal government. Policy makers consider rising health costs to be the biggest threat to the budget. Rising health costs have also eaten up more of workers' pay, contributing to the decline in real incomes over the last 15 years.

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