Health Care Costs Might Be Slowing Down

As the Affordable Care Act insurance plans make their faltering debut, our interest is caught up in new health care spending numbers for 2012 reported earlier this month by the Centers for Medicare and Medicaid Services (CMS).  The Affordable Care Act (ACA), as we noted here a month ago, was intended in large part to foster more affordable health care by giving greater access to health insurance and trying to require its use by younger, healthier people.  Other aspects of the law seek to restrain some costs, such as Medicare payment rates.

But interestingly, health care costs seem to have already been slowing, before the main insurance features of the Affordable Care Act have come into force.  We'll describe some of this slowdown for you and then try to highlight why it might be that you're not sure how health care costs could possibly be slowing down.

Health Care Spending Growth Cut in Half

In 2012, the total of health-care-related outlays in the country grew by 3.7%, making a fourth straight year of less than 4% growth.  By contrast, from 2000 to 2008, this spending grew 7.3% a year.  Also for 2012, the health-care sector expanded less than total gross domestic product (GDP) for a second year, so it absorbed 17.2% of the total economy, down from a peak of 17.4% in 2009 and 2010.[1]

The spending moderation is evident in most segments of health care delivery.  On average over the last four years, expenditures on hospital care have grown at 4.9% compared to 7.3% from 2000 to 2008.  Outlays for physicians' services rose at just a 3.3% average from 2008 to 2012, down from 6.8% from 2000 to 2008; physicians' compensation reflects this, increasing at a 2.0% rate in the latter four-year period after a 4.6% pace from 2000 to 2008.[2]  Prescription medications and other medical supplies expenditures have grown at just a 2.1% pace recently, from 8.5% before.

The last, more extreme move on drug outlays partially relates to a number of brand-name drugs whose patents expired, so they are now sold in generic form at much lower prices.  Other, more general slowing forces have been at work.  The recession is the prime factor named by many experts, as the associated declines in employment meant many people lost their employer-based health insurance, perhaps forcing them to postpone elective medical treatment.  If this is the weightiest factor, then it may result, these experts opine, that as soon as the economy picks back up, health care costs will surge anew.  Clearly as well, if costs have slowed because fewer people have access to care, that's hardly advantageous.

Fortunately there are some other, more favorable factors at work.  As we mentioned in our introductory paragraph, the ACA has some cost-cutting features that are already in place, including the limits on Medicare payment rates.   The law also penalizes hospitals with above-average readmission rates; this last has apparently already shown some identifiable effect in reducing readmissions, according to a Wall Street Journal op-ed by Jason Furman, the chair of the President's Council of Economic Advisers.[3] Other analysts note that the reduction in readmissions actually started ahead of the enactment of the ACA, so hospitals had clearly been working on the causes beforehand.[4]  We read occasionally about hospital-acquired infections, and there are, in fact, efforts in place to reduce those.[5]

Electronic Records, More Efficient Clinical Set-ups

There are some other structural forces helping to slow costs.  Does your doctor use electronic medical records (EMRs)?  We had thought of that as helping coordinate care, but it's also a restraint on costs as it improves the efficiency of the office's operations.  For hospitals, having doctors' orders in type-written electronic form is reducing medication errors measurably.  Adoption of EMRs has lately been quite rapid: in 2009, 48% of doctors' offices used them, and by 2012 the share had risen to 72%.  Among hospitals, 44% were running them in 2012, nearly three times as many as just two years earlier.  Use of these even reduces the number of necessary lab tests, since patients' histories and records are more organized.[6]

Have you noticed all the "store-front" clinics popping up in shopping malls and, in one local example for us, the streets of downtown Brooklyn, where one is replacing a KFC-Tim Horton Coffee franchise?  These "urgent care centers" are more than doctor's offices but less than full-fledged hospital emergency rooms.  These "retail" medical centers are staffed by doctors, nurse practitioners and physician's assistants; they can handle flu, other infections, simple wounds and fractures.  They can save money by taking more routine health issues out of expensive emergency room settings.[7]

The ACA is fostering experiments with other kinds of delivery systems, notably the Accountable Care Organization and patient care medical homes.  These clinical centers manage patients' overall care and are encouraged to limit hospital admissions and many other costly kinds of treatment when at all possible.  Physicians are generally salaried, so they are not paid on a per-service or per-appointment basis as most have been traditionally.  It's not known yet whether all this will really work to the benefit of the patients and the payers in the long run, but such organizations as CalPERS, the enormous California state employees health plan, have found marked cost reductions right away.[8]

But Some Consumers Pay More of the Bill

Now, you may well be saying, "how can health care costs be slowing down?  MY health care costs just keep going up and up!"  Ah, yes.  Consumers' total healthcare outlays have been increasing more than their incomes: data from an annual Labor Department survey show that healthcare expenses – insurance, doctor bills and drugs and supplies – have risen from 4.8% of people's incomes in 2008 to 5.4% in 2012, with every broad income bracket showing a similar magnitude increase.

A main factor in this is the so-called "consumer-directed health plan" or CDHP, which mainly consists of insurance plans with bigger deductibles and higher co-pays.  If consumers have "more skin in the game", it is thought, they will take a more active role in their own health care decision-making and a more cautious role in utilization.  Some parts of this are quite positive: people do have more  information about healthcare choices and treatments.  There is even more information these days on costs for specific treatments and specific providers.  We've started to see the word "shop" applied: that is, we might "shop" for a doctor and/or treatment based on their cost-effectiveness.  Indeed, next time you need something more than routine care, ask about the cost.  Ask your doctor if that new med she is prescribing is the cheapest one that will do the job.

In all probability, as the process of cost moderation evolves, with all the various innovations we've described here, healthcare should become less financially burdensome for people, companies and governments.  Hospitals and doctors should be able to figure out how to conduct their practices more economically and efficiently to save on their own costs without imposing undue anxiety on their patients.  But for consumer patients themselves, the intervening transition period may not be much fun.  In fact, even among people who had private health insurance throughout the last recession, another government survey shows that, in 2011, a larger portion, 7.4%, did not get or delayed getting medical care due to cost, more than the 5.9% in 2005.[9]  This was clearly not a sign of progress.  It's a bumpy road.  But at least, the latest spending data show that we've started down the right road.

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[1]Centers for Medicare and Medicaid Services.  National Health Expenditure Data. January 6, 2014.  http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/NationalHealthAccountsHistorical.html and Martin, Hartman, Whittle, Catlin and the National Health Expenditure Accounts Team. "Nation Health Spending in 2012: Rate of Health Spending Growth Remained Low for the Fourth Consecutive Year". Health Affairs. Volume 33, Number 1: January 2014.  Pp 67 – 77.

[2]Physicians compensation data from U.S. Bureau of Labor Statistics.

[3]Jason Furman.  "ObamaCare Is Slowing Health Inflation". The Wall Street Journal.  January 6, 2014.  http://online.wsj.com/news/articles/SB10001424052702304617404579304483562111024.  Accessed January 25, 2014.

[4]Kenneth Kaufman and Mark Grube.  "The Slowing of Health Care Spending: Have We Turned a Corner?"  Health Affairs blog.  August 9, 2013.  http://healthaffairs.org/blog/2013/08/09/the-slowing-of-health-care-spending-have-we-turned-a-corner.  Accessed January 25, 2014.

[5]Kaufman and Grube.

[6]Kaufman and Grube.

[7]Tracy Yee, et. al. "The Surge in Urgent Care Centers: Emergency Department Alternative or Costly Convenience?" Center for Studying Health System Change: Research Brief.  July 2013. http://www.hschange.com/CONTENT/1366.  Note that the authors do express some ambivalence about current cost effects, but they expect the growing need for primary care facilities will increase the importance of urgent care centers.

[8]Kaufman and Grube.

[9]Centers for Disease Control. National Health Interview Survey.  Summarized in Health: United States 2012.  http://www.cdc.gov/nchs/hus.htm.