Economic Slowdown Responsible for Delayed Decrease in Health Care Spending

What causes health care spending to go up and down?  A recent study by the Kaiser Family Foundation has found that the economy has a dramatic effect on the changes in health care spending.  Health care spending is very comparable to any other consumer good:  when the economy is good, we spend more on health care; when it is poor we spend less.  The study found, however, that those changes in health care spending are not immediate and lag behind the economy by as much as six years.

Changes in Rate of Increase

Policy analysts have been perplexed at the reduced rate of  increase in health care spending  in recent years.  CMS’ Office of the Actuary has reported the decline in health care spending to be about 3.9 precent per year since 2009.  The Congressional Budget Office has lowered its forecast of future spending by Medicare and Medicaid in future years based on this recent reduction in the increase in health care spending.  In 2012, national health expenditures amounted to an estimated $2.8 trillion.   Because this number is so large, a small change in the growth rate can result in a savings of hundreds of millions of dollars. The Kaiser Family Foundation pointed this out by saying a “lowering of the growth rate by one percentage point on average over the next decade means that total health spending would be almost half a trillion dollars lower than expected 10 years from now.”

Economy Predicts

From 2001 to 2003, health care spending peaked at an average annual increase  of 8.8 percent.  Since that date, the rate of health care spending has decreased. The Kaiser Family Foundation research found that “inflation in the current year, as measured by the Gross Domestic Product (GDP) deflator, as well as inflation in the prior two years” and “the growth in real GDP in the current year as well as the GDP growth in prior five years” was a way to predict the rate of increase in health care spending.  Its analysis found that these factors accounted for 85 percent of the variation in health care spending from 1965 to 2011.

Time Lag

“More surprising” writes the Kaiser Family Foundation is that these effects can take up to 6 years before they start influencing the rate of health care spending. The researchers speculated that the causes for this delay might include: (1) the use of insurance which protects people from the full cost of health care for a period of time; (2) consumers cutting back on health care spending only after they have cut back on spending on other items and services; (3) employers delaying  immediate changes to their health care policies for a year or two after economic changes; (4) the inability of hospitals, which account for a large percentage of health care spending, to address changes in their spending for a while after the economy changes; and (5) legislated changes as a result of economic changes may not be implemented for a number of years.

The analysis indicated that the health care spending should have decreased by 3.6 percentage points from the peak. In reality, the average decrease in health care spending was 4.2 percent during that time period, 2008 to 2012.  From these figure it can be surmised that the economic downturn was responsible for 77 percent of the decrease in health care spending.  What accounted for the other 23 percent? Kaiser attributes changes to the health care system, like higher deductibles and other cost sharing mechanisms to slow the use of services, as well as increased use of managed care and delivery system changes.

Future Growth

In the future, the Kaiser Family Foundation’s analysis predicts that a health care spending increase of 3.5 percent by 2019 can be expected due to growth in the economy.  Adding in other factors, the analysis predicts that the increase in health care spending could remain relatively flat for the next couple of years and then grow by 7.1 percent at the end of the decade. It is unlikely that double-digit increase in health care spending is likely to return, writes the Kaiser Family Foundation.

“There is a very strong statistical link between business cycles and inflation and health spending,” said the Kaiser Family Foundation.  The analysis warns though that, “because the effect of economic activity on health prices and utilization is gradual and highly lagged,  it is not always easy to discern the relationship just by looking at a single year.”