Today’s report from the Council of Economic Advisers (CEA) provides a promising outlook on the future of health care costs and the impact of the Affordable Care Act (ACA) on slowing the growth of health care spending. Using data from the National Health Expenditures Accounts, the Congressional Budget Office, the Bureau of Economic Analysis, and the Centers for Medicare and Medicaid Services, as well as from recent studies conducted by the Kaiser Foundation, the Brookings Institution, and several other independent research centers and academic institutions, the CEA analyzed recent trends in health care costs, the forces driving these trends, and their likely economic benefits. The results of their analyses show that the current rate of health care spending growth is the lowest on record and health care price inflation is at its lowest rate in 50 years. The slow growth in health care spending has substantially improved the long-term federal budget outlook; according to the Congressional Budget Office (CBO), total Medicare and Medicaid spending will be reduced by approximately 10% by 2020. Though the historically low rate of health care spending growth is likely the result of multiple factors, the evidence strongly indicates that the ACA is a significant contributor to the marked slowdown in the growth of health care costs.
1. Health care spending is growing at the slowest rate on record
According to the most recent projections, real per capita health care spending has grown at an estimated average annual rate of just 1.3 percent over the three years since 2010. This is the lowest rate on record for any three-year period and less than one-third the long-term historical average stretching back to 1965. This slower growth in spending is reflected in Medicare, Medicaid, and private insurance.
2. Health care price inflation is at its lowest rate in 50 years
Measured using personal consumption expenditure price indices, inflation for health care goods and services is currently running at just 1 percent on a year-over-year basis, the lowest level since January 1962. (Health care inflation measured using the medical CPI is lower than at any time since September 1972.)
3. The slowdown in health care cost growth is not solely due to the Great Recession; something has changed
The fact that the health cost slowdown has persisted so long even as the economy is recovering, the fact that it is reflected in health care prices – not just utilization or coverage, and the fact that it has also shown up in Medicare – which is more insulated from economic trends, all imply that the current slowdown is the result of more than just the recession and its aftermath. Rather, the slowdown appears to reflect “structural” changes in the United States health care system, a conclusion consistent with a substantial body of recent research.
4. The ACA is contributing to the record slow growth in health prices and spending, and is improving the quality of care
ACA provisions that reduce Medicare overpayments to private insurers and medical providers are contributing to the recent slow growth in health care prices and spending. Other ACA reforms are reducing hospital readmission rates (see figure below) and increasing provider participation in payment models designed to promote efficient, high-quality care.
Data Source: Centers for Medicare and Medicaid Services, Offices of Enterprise Management
Intriguingly, recent economic research suggests that the ACA’s reforms to Medicare may have “spillover effects” that reduce costs and improve quality system-wide, not just in Medicare. Accounting for “spillover effects” of the ACA’s reductions in Medicare overpayments suggests that the ACA has reduced health care price inflation by 0.5 percent per year since 2010, which represents a substantial fraction of the recent slowdown in health care price growth.
5. Slower growth in health care costs, thanks in part to the ACA, is likely to have substantial benefits for the American economy
The Congressional Budget Office has reduced its projections of future Medicare and Medicaid spending in 2020 by $147 billion (0.6 percent of GDP) since August 2010. This represents about a 10 percent reduction in projected spending on these programs. These revisions primarily reflect the recent slow growth in health care spending.
Data Source: Congressional Budget Office projections.
In the short run, slower growth in health spending is a positive for employment: The slow growth in health care costs has reduced employers’ benefit costs, increasing firms’ incentives to hire additional workers. Available estimates suggest that these gains could be substantial, although their magnitude is uncertain.
Over the long run, slower growth in health spending translates directly into higher wages and living standards: If just half the recent slowdown in spending can be sustained, health care spending a decade from now will be lower by $1,400 per person, a benefit that workers will realize in the form of higher wages and that federal and state governments will realize in the form of lower costs.
6. New economic research shows that the ACA’s Medicare reforms are likely to reduce health care spending and improve quality system-wide.
Recent research implies that reforms to Medicare will have “spillover effects” that reduce costs and improve quality system-wide. In economic terms, this suggests that efforts to reform Medicare’s payment system are “public goods.”
7. Accounting for “spillovers” implies that the ACA’s effect on health care price inflation may be much larger than previously understood.
The direct effect of ACA provisions that reduce Medicare overpayments to private insurers and medical providers has been to reduce health care price inflation by an estimated 0.2 percent per year since 2010. Accounting for the “spillover effects” discussed above raises this estimate to 0.5 percent per year, which represents a substantial fraction of the recent slowdown that can be directly attributed to the ACA.
- This chart is amazing news for our health cost problem (washingtonpost.com)
- Report: Rise in health care spending lowest on record (usatoday.com)