Slower Growth of Health Costs Eases US Deficit
A sharp and surprisingly persistent slowdown in the growth of health care costs is helping to narrow the federal deficit, leaving budget experts trying to figure out whether the trend will last and how much the slower growth could help alleviate the country's long-term fiscal problems.
In figures released last week, the Congressional Budget Office said it had erased hundreds of billions of dollars in projected spending on Medicare and Medicaid. The budget office now projects that spending on those two programs in 2020 will be about $200 billion, or 15 percent, less than it projected three years ago. New data also show overall health care spending growth continuing at the lowest rate in decades for a fourth consecutive year.
Health experts say they do not yet fully understand what is driving the lower spending trajectory. But there is a growing consensus that changes in how doctors and hospitals deliver health care — as opposed to merely a weak economy — are playing a role. Still, experts sharply disagree on where spending might be in future years, a question with major ramifications for the federal deficit, family budgets and the overall economy.
Part of the slowdown stems from "the recession and the loss of income and wealth" causing people to cut back on health care, Douglas W. Elmendorf, the director of the Congressional Budget Office, said last week. But he added that a "significant part" of the slowdown "probably arises from structural changes in the health care system."
Some insurers have moved away from simply paying per procedure by giving health care providers financial incentives to reduce complications and rehospitalizations, for instance. Doctors, nurses and hospitals have also taken steps to reduce wasteful treatments. Many of the changes predate the 2010 health care overhaul, but the law has also contributed to the changes by offering some financial incentives, health care experts say.
Even if slower growth persists, the cost of health care poses one of the greatest threats to the country's fiscal health. It threatens to consume a larger proportion of the overall budget, meaning larger deficits, cuts to other programs, higher taxes or some combination of the three. Remaining on a lower cost trajectory would reduce the pressure on Democrats and Republicans seeking to put the country on a sounder fiscal path.
"We're not going from unsustainable to sustainable," said Jared Bernstein of the Center on Budget and Policy Priorities, a liberal-leaning research group in Washington. "Even if the recent changes persist, we're not done in terms of achieving sustainability in health care cost growth, but we have more time to figure out what's working without hacking away at social insurance," added Mr. Bernstein, a former economic adviser to Vice President Joseph R. Biden Jr.
One sign that the slowdown might be lasting is that it seems to have started before the recession took hold and is continuing even as the economy picks up. "The more we look at the data, the more it seems to me that the cost curve did bend before the recession," said Charles Roehrig of the Altarum Institute, a health care research organization.
Additionally, health spending did not seem to decline or slow down more in states that were hit harder by the economic downturn, and it has flattened for Medicare patients, even though they tend to be sheltered from the effects of economic fluctuations.
"If you go out and talk to doctors and hospital executives, they believe their world is changing," said Peter Orszag, a former budget director in the Obama administration and now a vice chairman at Citigroup. "Nothing in life is conclusive, but I think the case for this being at least partially structural is much stronger than the case for it being entirely cyclical."
The slowdown has occurred in both government and overall health spending. From 2009 to 2011, total health spending grew at the lowest annual pace since the government started keeping records 52 years ago, a trend that seems to have continued last year.
In the 2012 fiscal year, Medicare spending per beneficiary grew just 0.4 percent. The new Congressional Budget Office data said that overall Medicare outlays grew 3 percent in 2012, the slowest rate since 2000.
A major question raised by Mr. Elmendorf and others is whether the spending will accelerate again. (It slowed in the 1990s only to pick up again last decade.) "There's a lot of reasons to suspect it's temporary," said Douglas Holtz-Eakin, a former director of the Congressional Budget Office and a prominent Republican economist. "Premature celebration never makes sense when it comes to health care," he added.
Slower cost growth would have ramifications far beyond the deficit. According to calculations by White House economists, slowing the annual growth rate of health care costs by 1.5 percentage points might increase economic output by 2 percent in 2020 and 8 percent in 2030. It might also lead to higher wages for workers and more room for productive investments in the budget.
Even if the slowdown continued, the deficit problem would hardly be solved, budget experts said. One situation described by the Altarum Institute imagines tax revenue at about 19 percent of economic output and health care spending growing about as fast as economic output did. Assuming a balanced budget, that would leave 6 percent of economic output for spending on defense, safety net programs and other nonhealth programs in 2035. The modern low is around 8 percent, Mr. Roehrig said.
"It is possible to keep the policies for those large benefit programs unchanged, but only by raising taxes substantially for a broad segment of population," Mr. Elmendorf said. "Alternatively, it's possible to keep tax revenues at their historical average of percentage of G.D.P., but only by making substantial cuts relative to current policies in the large benefit programs that aid a broad group of people at some point in their lives."