Will Slowdown in Health-Care Spending Growth Persist?

One of the biggest questions hovering over the federal budget – and, indeed, over the U.S. economy – is whether the recent slowdown in the pace of health-care spending growth will persist. Experts disagree. Here’s a taste of the debate.

It won’t persist, says Louise Sheiner, a Federal Reserve Board economist. The pace of health-care spending growth follows the economy – but with a long lag. When a recession hits, people do cut back a bit on their health spending, but the big effects come four or five years later because it takes a long time for employers to decide to cut costs and then to change their insurance plans (say to make workers pay more of the tab, or to encourage more workers to shift to managed-care plans) and then for workers to respond. “The slowdown in health spending growth observed since 2002 is largely the result of the two recessions that occurred in the last decade, rather than representing a new innovation,” Ms. Sheiner argues. Her bet: The ripple effects of the Great Recession are going to wear off soon and health-care spending growth rate will rebound.

Indeed, says Charles Roehrig of the Altarum Institute, preliminary data point to a pickup in the pace of health spending growth in late 2013 and early 2014. National health spending in February was 6.7% over year-earlier levels. That’s the fastest year-over-year growth rate since March 2007, just before the recession began. Some of this reflects the start of the Affordable Care Act, which expanded the number of people with health insurance, but not most of it, he says.

David Cutler, a Harvard economist who has been working on Massachusetts’ health-care experiment, challenged all this at a conference convened by the Engelberg Center for Health Care Reform at the Brookings Institution. In the recent past, new technologies added to cost. But increasingly, he said, new medical technologies are replacing other technologies, e.g., minimally invasive surgery, or we’re learning that some technologies don’t do much good, e.g., Caesarian sections. We are, he added, “wasting an enormous amount” in health care in various ways – between one-quarter and one-half of all health spending – and we’re (finally, but slowly) learning how to reduce that waste and increase the efficiency of the health-care system.