No single government report more reliably generates editorials on the nation’s healthcare “crisis” than the annual CMS actuary’s report on US health spending. I’ve long suspected that a lot of these editorials, like obituaries, are written in advance, so that the editorialist can simply fill in the new numbers.  A two-decade long accumulation of these editorials has driven the political narrative that health costs are “out of control”. 

This year, however, the editorial dogs failed to bark.   On January 5, the CMS actuary report on health spending for the year 2008 revealed a 4.4% increase in national health spending, the lowest rate of increase since end of the Eisenhower administration. Since we experienced nearly 1% population growth during 2008, per capita spending grew in the mid 3% range.

CMS cited fading demand for prescription drugs, hospital inpatient services and physician services as major contributors, as well as a decline in the number of privately insured lives.  Retail outlet sales of medical items grew by 0.5%, and per capita use of prescription drugs actually declined modestly.  CMS concluded that “the current economic recession appears to have exerted considerable influence on the health sector in 2008”. 

As you can see from the Exhibit, however, the subsidence in health cost growth has been going on since 2003, predating the recession by four years.  Based on my semi-random walk through the nation’s health system last year, I’m confident that 2009 will be a sixth year of cost moderation.  The iconic cost curve is well and truly bent, and the recession is not the principal reason.

How should we feel about this uncelebrated cost moderation? Is it good news?   Is cost containment less urgent because some invisible hand has magically accomplished what our political system has so far failed to do?  Does this lessen pressure on Congress to pass health reform, or to take the difficult steps to wring greater value out of our health spending?  The short answer to all these questions is “no”. 

What’s Behind The Slowdown In Health Care Cost Growth?

I believe the sustained slowdown in health cost growth has been produced by two main factors.  On the supply side, despite escalating R&D spending, there has been, as the CMS report briefly mentions, a drought in technological innovation in healthcare, particularly in new drug introductions and in diagnostic technology (the twin drivers of health cost inflation in the 1980’s and 1990’s).  While the Wall Street Journal editors may blame this on the FDA and Henry Waxman, I believe that lawyerly, bureaucratic corporate leadership, lagging public research investment, and creative “menopause” in the scientific community are the more likely culprits. 

However, the main contributor to the sustained slowdown in health costs has been soggy demand for health services.  I believe this has been produced by a collision between high health costs and a spreading family cash flow problem.  The origins of the current recession predated the stock market crash by at least a year.  In the fall of 2007, the Bureau of Labor Statistics reported that, thanks to rising household food and energy costs, the purchasing power of the American worker’s paycheck began declining, and the decline accelerated during 2008. 

As a result, families could no longer afford to service the staggering $14 trillion in household debt they accumulated in the previous decade’s credit saturnalia, and began a cascade of defaults on mortgages, credit cards and auto loans. They also stopped spending money.     These forces by themselves would have produced a serious recession, even without the added “stimulus” of the late 2008 catastrophic financial meltdown. 

It isn’t merely the 46 million uninsured who are having trouble paying their bills, but a large number of insured people as well. The Center for Studying Health System Change reported last spring that 20 percent of insured people with chronic conditions had trouble paying their medical bills in 2007.  Of the more than 20 million people with chronic illnesses who had trouble paying their medical bills (insured and uninsured), half had put off receiving care and more than half had declined to fill prescriptions written to address their medical conditions.

Out-Of-Pocket Spending Continued To Rise More Slowly Than Overall Spending, But Many Already-Stressed Consumers Faced High OOP And Premium Costs

The CMS actuaries noted that the typical consumer spent about 5.9% of their household income on healthcare in 2008.    Moreover, consumer out-of-pocket spending fell to 11.9% of total health costs, a new record low.  The problem is, however, that family health cost exposure is wildly maldistributed around that 5.9% mean, and that health costs are both unpredictable and “lumpy”.   Even wealthy families are stressed by a major medical expense that might require $10,000-20,000 in cash outlays.   And if you have no cash, a new medical expense is likely to be deferred if possible, regardless of how important it may be in reducing your health risk.  People also stop paying their medical bills, resulting in escalating bad debts for hospitals and physicians.

In fact, the steady growth in co-insurance (which according to the Kaiser Family Foundation more than doubled in real dollars between 1999 and 2007) might have been an unscripted supporting actor in causing the recession. The fact that the purchasing power of those paychecks did not grow during the entire decade after 2000 could, in major part, be attributed to steady increases in health premium cost sharing, affecting those at the bottom of the income ladder the most. 

Of course, one way to make health coverage more affordable for households is to subsidize their health insurance coverage with tax dollars and to limit out of pocket exposure.   The legislation perhaps wending its way through Congress to the President’s desk does both of those things.  However, as repeatedly noted by skeptics, pending health reform legislation does next to nothing to reduce the costs themselves.

The Brisk Growth In Federal Health Spending

Federal spending on healthcare rose by 10.4% in 2008, despite the moderation in cost growth for every other payer.  This was attributed to enrollment increases in Medicare Advantage as well as one quarter of stimulus subsidy to states for their Medicaid costs. In 2008, the share of federal receipts consumed by health spending rose a full eight points, from 28% to 36%. 

As health reform will increase federal matching for Medicaid and SCHIP, perhaps permanently, and devote a (laughably underestimated) $576 billion to subsidizing private health insurance purchases over ten years, federal health spending is likely grow in double digits far out onto the horizon.

What is actually “out of control” is federal health spending.  Merely federalizing health cost growth does nothing to solve the problem of affordability; it merely shifts the locus of the problem from household budgets to the federal budget. It simply substitutes federal dollars borrowed from the Chinese for corporate dollars borrowed from Goldman Sachs or consumer dollars borrowed from home equity, VISA and the credit union. 

The rate of health cost growth in the United States had been reduced almost by half in just four years.  The cost curve has been bent by the absolute burden which health costs represent for American families and businesses. The real problem is that we simply cannot afford the health system we have.  The affordability problem doesn’t disappear under health reform- it just gets shifted to a government with a well-known incapacity to say “no” to anyone.  

The flurry of cost containment “science projects” contemplated by health reform legislation provides little reassurance that future federal outlays will be reduced, given the sorry track record of past demonstration projects.  Whether federal health spending is brought under control will depend ultimately on whether Congress will permit the incomes of any actor in the health system to actually decline.  

During the campaign, then-candidate Obama argued that it was unfair to require people to purchase health insurance until healthcare could be made more affordable.  With the benefits of a year of hindsight, that was the correct diagnosis.  Whether the bill he hopes to sign in a few weeks meets that test remains to be seen.