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HEALTH SPENDING: Fear The Dragon, Or Slay It?

January 11th, 2008

Two trillion dollars is a lot of money. So when Health Affairs published earlier this week an official estimate of health spending in 2006 that exceeded that amount, it was big news. Media outlets all over the planet picked it up. The journal tallied a record number of pageviews for a single day — more than 100,000 — on its Web site. But many reports glossed over one of the more interesting details in the numbers from the Centers for Medicare and Medicaid Services. In contrast to the emphasis in a recent study by the Congressional Budget Office (CBO), CMS found that spending growth exceeded the growth in gross domestic product (GDP) by only 0.6 percent in 2006, and that health spending as a percentage of GDP has been flat since 2003.

The difference between growth in health spending and GDP constitutes a kind of de facto sustainability index for the health sector. In the long run, it tends to creep ever upward, averaging 2.1 percent per year from 1975 to 2005, according to CBO. In some long-term projections, health care eventually eats the nation’s entire economic output. Short-term lulls in excess cost growth, as CBO calls it, are sooner or later erased by cyclical surges. CMS analysts explained carefully this week how the current slowdown can be seen as a lagged effect of an eight-month recession in 2001, reflecting the time it takes for diminished receipts to work their way through corporate budgets and into health insurance contracts and premium outlays.

Cyclical effects are powerful, and not to be underestimated. But they’re not necessarily immutable, as the history of the health insurance underwriting cycle suggests. So is there anything about the current flattening out of the excess cost growth cycle that might inform policymakers’ urgent quest to subdue this fearsome dragon? Could there be a better time, for example, to start a serious conversation about capping the tax exclusion for insurance premiums? High-end workers with rich benefits will squawk, and so will their employers. But if the excess cost growth cycle is sensitive to corporate budgets, doesn’t that imply that corporate budgets are sensitive to marginal changes in premium expense, and that firms would be more likely to exercise restraint in purchasing benefits without this notorious sweetener? We’re hearing a lot about shared responsibility these days. This would be a nice place to start.

It’s not clear how quickly or effectively the nation can ramp up its capacity to produce comparative effectiveness research, as CBO’s Peter Orszag urges. But there is a political consensus in favor, and a U.S. clinical effectiveness institute could provide a platform for tackling supplier-induced demand, another politically uncontroversial desideratum.

Also on the short list of obvious possibilities, Paul Ginsburg’s commentary on this week’s CMS estimates cautions that the reported deceleration in spending growth is threatened by increasing hospital capacity in the communities monitored by his Center for Studying Health System Change. Here’s another powerful influence, not to be underestimated. But the profitability of the services that are driving a renewed medical arms race is a byproduct of specific payment policies that were made by human hands and can be changed the same way.

It’s always tempting to allow expectations to inflate during election years. Most of the talk in the months to come is going to be about coverage expansions, which cost rather than save money. But it’s also clear that affordability is a key to coverage. Health care cost growth is so deeply ingrained that it sometimes seems like a force of nature. But it ain’t necessarily so.

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4 Responses to “HEALTH SPENDING: Fear The Dragon, Or Slay It?”

  1. Glenn Gillen Says:

    As a foreigner I’m not as well versed on the US health system as I could be, but isn’t there just a slight possibility that the level of inefficiencies are a by product of the level of privatization that has occurred in the sector? A sector that requires ever increasing amounts of spending to continually improve the bottom lines of the insurance and other companies that suck on the sector like leeches?

  2. hankkearney Says:

    This commentary finishes with the statement…”Most of the talk in the months to come is going to be about coverage expansions, which cost rather than save money. But it’s also clear that affordability is a key to coverage.”

    Well, there’s also the argument that expanded cover improves efficiency of the financing system. With too many (defined as greater than 1) out of the financing system, those in the system pay a greater amount for same service (insurance OR medical).

    So, with the highly inefficient health care system we have in the US, I would suggest we broaden the discussion from simple costs to include how all that spending is financed.

    We don’t get a whole lot for our 16% of GDP.

  3. Rob Cunningham Says:

    I plead guilty to not having made a thorough canvass of the coverage, but a couple of the first reports I saw commented that whatever was happening in 2006, costs were growing much faster than GDP as a general rule. In any case, I don’t want to pick nits with my fellow scribes. I just wanted to stop and contemplate the slowdown and try to understand it, because I am myself under the general impression that excess cost growth is an intractable problem.

    I think it’s quite plausible that the political environment plays a role. But if the current slowdown goes back to 2003, when the MMA was enacted but nothing else that could be described as reform was on the horizon, then that dog doesn’t hunt. I’m not sure the cyclical effects account for the whole pattern either, although a lot of economists seem to respect this interpretation — not that I have scientifically surveyed all of them either. It’s somewhat frustrating that interpretations tend to vary by the discipline of the analyst. There are economists, behavioral economists (not enough of them), political scientists, sociologists, etc. I suspect we could use some anthropology, too. But it would be nice to have more integrative, interdisciplinary thinking that explores the relationships among the different force fields that are in play.

    Thanks for your interest and your thoughts.

  4. mgoozner Says:

    It’s not fair to say most commentators missed the angle that nominal spending on health is growing at only a slightly higher rate than nominal GDP. Most newspaper accounts noted it, as did my blog post (see

    On the substance of your post: I don’t think the CBO’s suggestion that this is an effect from the 2001 recession is credible. You suggest economic cyclical effects may play a role, but you leave out the most important cyclical effect: the political cycles of health care reform. The last time there was a slowdown in health care spending that drove it close to GDP growth was in 1993-94 — the last time there was a serious threat of health care reform. I’d argue that the fact that the sector again faces the threat of reform helps explain the current slowdown. Drew Altman of the Kaiser Family Foundation was the first to draw attention to this political cycle effect.

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