Why U.S. Health Spending Has Slowed Down

The United States’ $2.8 trillion health-care bill grew at a slower rate than the economy did during 2012, as newly released federal data marked the fourth-consecutive year in which medical spending increased more slowly than during any time since the government started measuring it half a century ago.

What we pay for health care crept up by only 3.7 percent in 2012, a rate in line with annual growth since 2009. Before the Great Recession, the U.S. experienced average annual increases in health-care spending that topped 7 percent from 2000 to 2008.

The moderation since the recession ended has little to do with the Affordable Care Act, which passed after the slowdown was already under way, and more to do with a stunted economic recovery and stalled job growth: “Income and employment growth was modest over this period, and there was a slow recovery from private health insurance enrollment losses that occurred during 2008–10,” economists from the Centers for Medicare and Medicaid Services wrote in an article published on Monday in the journal Health Affairs.

Two temporary changes that the U.S. won’t be able to count on in future years helped hold down the rate of health spending in 2012. First, there’s what the pharmaceutical industry calls the patent cliff. Blockbuster drugs such as Lipitor have lost patent protection, opening the market to lower-cost generic competitors and helping hold spending on prescription drugs to a 0.4 percent increase between 2011 and 2012. A one-time cut in what Medicare pays nursing homes also took effect in 2012.

Slower medical inflation—the rate at which prices for health-care goods and services increase—helped curb overall costs. Medical prices increased by 1.7 percent in 2012, compared to 2.4 percent the previous year, the researchers found. Slower medical inflation, as Bloomberg Businessweek’s Peter Coy pointed out last month, is good news.

Not all costs showed such restraining increases. Spending on hospital services increased faster than overall health spending, driven by both higher prices and “the use and intensity of services.” That means how often people go to the hospital—and how they’re treated: Getting costly knee surgery, for example, rather than physical therapy that may be just as effective. Spending at the doctor’s office also increased, the researchers found, “driven primarily by increases in the volume and intensity of services provided.”

The $2.8 trillion America spends on health care counts what we pay for doctor and hospital visits, prescription drugs and medical devices, nursing-home care, and home-health aides. It also includes other costs not as visible to consumers, such as running the bureaucracies of Medicare, Medicaid, and private insurance companies or building new hospital buildings and buying MRI machines.

On a per-capita basis, the country spends far more (PDF) than other developed countries without achieving greater health, according to the Organisation for Economic Co-operation and Development. A look at the chart shows that he U.S. is in a different league when it comes to health spending:

Data: OECD

That’s partly why the numbers published today are so important. If the U.S. can keep the growth of health-care costs at a moderate level, the country might eventually get spending more in line with the rest of the developed world. Some parts of the Affordable Care Act are intended to hold costs down, but the law does much more to expand access to health insurance than it does to curb spending on medical care.

If the slowdown merely reflects an extended hangover from the Great Recession, health spending could resume growing far faster than the rest of the U.S. economy. The paper’s authors say it’s too soon to tell: “From our perspective, more historical evidence is needed before concluding that we have observed a structural break in the historical relationship between the health sector and the overall economy.”

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