Brief Note on Rising Medical Expenditures

by Reihan Salam

Last month, Peter Orszag referenced the recent deceleration in health care costs in a column for Bloomberg View:

A report released last week by the Altarum Institute estimates that health-care costs have risen less than 4 percent over the past 12 months. The conventional wisdom to date has been that this slowdown, which has persisted for years now, is due to the weak economy. As the economy recovers, under this view, cost increases will spike again — and if so, [Paul] Ryan’s toxic medicine could be seen as worth a try.

A growing body of evidence, though, casts doubt on this cyclical explanation. Altarum Institute researchers, in a separate report published last week in the New England Journal of Medicine, note that the slowdown predates the recession, making it difficult to argue it is solely due to the downturn. Evidence from Medicare suggests the same thing: A simple analysis shows no statistically significant relationship between Medicare spending trends across states between 2007 and 2010 and the rise of unemployment in each state over that period, suggesting something other than just the economy is at play.

Instead, as I have written, a number of structural changes — including actual and anticipated payment reform, and the expanded use of information technology to drive clinical decisions — are playing at least some role in slowing the growth of health-care costs. Along with others, I have put forward numerous proposals to reinforce these trends.

Our proposals have three core attributes: They build on recent progress, they recognize there is no one simple solution to increase value in health care, and they emphasize the role of providers rather than insurance companies in improving that value.

More recently, the Health Care Cost Institute released a less encouraging result for 2011, as Alex Wayne of Bloomberg Businessweek reports:

Costs for people with employer-sponsored insurance plans jumped 4.6 percent in 2011, more than the government’s 3.9 percent estimate for the entire health system, the Health Care Cost Institute, which analyzed claims from UnitedHealth Group Inc. (UNH), Aetna Inc. (AET) and Humana Inc. (HUM), said today. A study by the U.S. Centers for Disease Control and Prevention found the number of people without insurance climbed 1.7 percent in the first quarter of 2012.

The data pose a challenge for the Obama administration as it carries out the 2010 Affordable Care Act, which promises to expand coverage to 30 million Americans starting in 2014 and trim health costs. The CDC reported that 47.3 million people lacked insurance, and the health institute said hospitals and doctors raised prices at a clip that outstripped demand.

Wayne interviews Martin Gaynor, an economist who suggests that the Affordable Care Act may have played a role in this rise in health care costs:

The overhaul law may be contributing to higher costs, said Martin Gaynor, an economics professor at Carnegie Mellon University and chairman of the Washington-based Health Care Cost Institute. The act tries to limit insurers’ administrative expenses and profits by requiring companies to spend at least 80 percent of their premium revenue on medical services. To meet that threshold, they may be letting prices rise, he said.

It is important to stress that the Altarum Institute report Orszag cited was gauging national health expenditures from June of 2011 to June of 2012 while the HCCI report is looking at health care costs for people with ESI over 2012, so we’re not looking at an apples to apples comparison. It is possible that while ESI costs have increased at a fast clip, Medicare and Medicaid costs have grown at a far more restrained pace. But if the structural changes Orszag identifies have not contributed to a significant deceleration of health care costs in the ESI sector, which covered 58.6 percent of non-elderly Americans as of 2010 (a steep decline from 69.2 percent in 2000), one wonders if we might need a change in direction after all. This would be particularly true if provisions of ACA have exacerbated the problem, as Gaynor tentatively suggests.