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Study Finds Recent Slowdown in Health Spending Growth Mostly Tied to Economy

Spending expected to move towards historical levels as economy recovers (Apr. 22)

A new Kaiser Family Foundation analysis of how the economy affects the nation’s health spending concludes that the record slow growth rate of recent years stems largely from economic factors beyond the health system, with the economy explaining 77% of the slowdown, and more rapid growth expected in coming years if the economy strengthens as expected.

Based on statistical modeling and analysis by health-cost experts, the study assesses how much the economy is driving the nation’s recent slowdown in national health spending — a category encompassing what individuals, employers, and governments collectively spend.

Government statistics show that health spending grew by 3.9% each year from 2009 to 2011 — the slowest growth since the government began tracking it in 1960. Estimates suggest that slow growth in health spending continued into 2012. On average, health spending grew by 4.2% per year from 2008 to 2012 — down from the recent peak of 8.8% from 2001 to 2003.

Based on statistical analysis of 50 years of health spending and economic trends, the study finds that the economy, including factors such as Gross Domestic Product growth and inflation, produces a major but delayed effect on the nation’s health spending. This effect stretches over a period of 6 years, meaning that the recession that ended in 2009 will continue to dampen health care spending for several more years and that spending will increase gradually as the economy strengthens, the report says.

Economic factors alone account for 77% of the reduced growth in national health spending from its 8.8% peak in 2001 to 2003. The remaining 23% results from changes in the health care system, potentially including higher deductibles and other cost-sharing that dampen patients’ use of services, as well as various forms of managed care and delivery system changes. The study could not determine the separate effects of these factors.

Although the recession will likely continue to dampen health spending growth over the next couple of years, the study projects that expected economic growth will drive up health spending in years ahead — gradually adding 3.5% to the annual growth rate by 2019. This would push the annual growth rate in health spending back over 7%, which is much closer to historical averages, the report notes.

A number of factors could alter the rate of increase in health spending in the years ahead and are not explicitly accounted for in the study. The Patient Protection and Affordable Care Act (PPACA) will likely produce a modest one-time increase in health spending as more people gain insurance coverage through health insurance exchanges and broader eligibility for Medicaid. The PPACA is also expected to generate substantial savings in Medicare through smaller increases in payments to providers and insurers. Other PPACA provisions could also reduce costs. In addition, new delivery models being developed in the public and private sectors, as well as higher deductibles in private insurance plans, could dampen future cost growth.

With national health expenditures totaling about $2.8 trillion in 2012, trimming anticipated growth by even a single percentage point could reduce spending by more than $2 trillion over the course of a decade, with big implications for government, private-sector, and family budgets, the report says.

Source: Kaiser Family Foundation; April 22, 2013.

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