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2011 Health Spending Growth Ticks Up: Should We Be Concerned?

October 1st, 2012

I am taking a break from analyzing national health spending sustainable growth rates to look at recent patterns of growth.  I was inspired by the September 25 spending estimates from the Health Care Cost Institute (HCCI) showing an uptick in the growth rate for 2011 to 4.6 percent.  Their press release included the following:

Health care spending growth has been on a downward trajectory.  HCCI found spending growth slowed from 5.8 percent in 2009, to 3.8 percent in 2010 for those with employer-sponsored insurance.  With a sluggish economy, many experts anticipated a modest growth rate for 2011.

“While it’s hard to know whether this means spending levels are going to continue rising, it clearly is a signal that we have to pay attention to,” said HCCI Governing Board Chairman Martin Gaynor, PhD, Professor of Economics and Public Policy at Carnegie Mellon University. “We need to continue studying these data to see whether this acceleration in spending growth is the beginning of an upward trend that will return us to pre-recession levels,” he added.

The Center for Sustainable Health Spending (CSHS) has developed data to support more timely tracking and analysis of health spending, prices, and employment.   Using these data, I present findings that shed some light on the issues raised by the HCCI report.

The 2011 Uptick Was Short-lived And Does Not Indicate A New Acceleration In Health Spending

The first chart (below) displays monthly data from our September Health Sector Economic IndicatorsSM (HSEI) spending brief. (Note 1)  Spending here refers to total national health expenditures, while HCCI analyzes per capita spending by a subset of the population with employer-sponsored insurance.   Thus, the growth rates shown in the chart are not directly comparable to those of HCCI.  Despite this difference, the uptick observed by HCCI in 2011 also appears in our total spending chart.

……………………………..(Click to enlarge.)

More importantly, our chart shows that this uptick was short-lived, that spending growth dropped precipitously in the latter half of 2011 and has remained moderate through July 2012.  This finding is consistent with the Truven (formerly Thomson Reuters) Healthcare Spending Index for Private Insurance, which shows growth rates slowing in the third quarter of 2011.  In addition, the 2012 Kaiser/HRET Employer Health Benefits Survey showed a historically low 4 percent increase in family health insurance premiums for 2012. In summary, the 2011 uptick observed by HCCI appears to be a short-term phenomenon and not indicative of an acceleration in health spending.

Returning To Pre-Recession Growth In Health Spending Would Not Be So Bad!

The dotted red line in the first chart shows the growth rate in potential GDP (PGDP). Potential GDP represents what GDP would be at full employment.  During periods of full employment, PGDP and GDP are equal and grow at the same rate.  During periods of recession and recovery, the growth rates differ, with PGDP growth being much more stable and providing a better indicator of long-run GDP growth.  For this reason, PGDP provides a better measuring stick than GDP for identifying excess growth in health spending.

Bending the health care cost curve, then, can be viewed as closing the gap between health spending growth and that of PGDP.   As the chart shows, this gap was very small in 2000 (the end of the managed care era), exploded in the early 2000s (managed care backlash), and then declined in late 2005.  Between 2005 and the start of the recession in December 2007, the gap remained quite small, despite the introduction of Medicare Part D in 2006.  In general, this pre-recession gap is smaller than the post-recession gap.  Thus, returning to pre-recession growth in health spending, when defined relative to the growth in potential GDP, would actually be an improvement over most of the post-recession period!  This conclusion is masked by the higher growth rate in health spending in the pre-recession period (over 6 percent) than in the post- recession period (about 4 percent except for the first half of 2011). The latter mainly reflects a drop in general inflation.

Per Capita Health Spending Illustrates The Pre-Recession Bend And Low Growth Since 2011 Uptick

The growth rates in health spending, GDP, and PGDP are all affected by changes in general inflation and population growth.  Increases in health spending that are due to general inflation and/or population growth are not indicative of excess spending; it would be instructive to create a measure that largely eliminates their effects.  One such measure is constant dollar per capita health spending.  Constant dollar growth means over and above general inflation.  Per capita growth is independent of population growth.  The second chart (below) plots this measure and illustrates the dramatic drop in spending in 2005.  Surprisingly, spending growth during the pre-recession period, at about 2 percent, was lower than the latter half of the 1990s when managed care was in full swing.   Moreover, the 2011 uptick is apparent, as is the subsequent return to 2 percent growth over the past twelve months. (Note 2)  Viewed in this way, the 2011 uptick appears temporary and we have now returned to the low levels of pre-recession growth that began in 2005.

……………………………..(Click to enlarge.)

Unfortunately, this does not mean that we are on a sustainable path.  As I noted at the top, this entry is a break from my recent preoccupation with quantifying sustainable health spending.  Those blogs illustrate why even historically low growth rates in health spending may not be low enough.  With so much health care publicly funded, sustainability depends on what we’re willing to pay in taxes and what we spend on non-health care items (assuming that there is a base commitment to have most Americans covered with health insurance).  I will be returning to this sustainability analysis, and the CSHS will, of course, continue its timely health sector tracking.

Note 1: Spending estimates are based upon monthly data from the Bureau of Economic Analysis (BEA), transformed for consistency with the official annual figures from the National Health Expenditure Accounts (NHEA).  Since NHEA run through 2010, our monthly estimates for 2011 and 2012 are based upon BEA data, adjusted to NHEA using the historical relationship between the two.

Note 2: The odd peak in 2009 is a combination of a short burst in health spending and an abrupt drop in the overall inflation rate.

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    October 5th, 2012 at 12:01 am
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