Economic growth is most often measured by growth in gross domestic product (GDP), which is the value of all final goods and services produced in an economy. Recent revisions to the first quarter 2014 estimates of U.S. GDP growth have raised concerns over the extent to which the Affordable Care Act (ACA) might be impacting economic growth.
The Bureau of Economic Analysis (BEA) first estimated GDP growth for the first quarter of 2014 to be 0.1 percent on an annualized basis. Then a revised second estimate was made, which indicated a decline in GDP of 1.0 percent on an annualized basis. Finally, on June 25 a second and final revised estimate of a 2.9 percent decrease on an annualized basis was released.
While revisions to initial estimates of GDP growth are not uncommon, one aspect of this second revision was, indeed, uncommon. Nearly two-thirds of the second downward revision (1.2 of the 1.9 percent) was attributed to health care spending being substantially lower in the first quarter of 2014 than was originally forecasted by the BEA.
While GDP growth on the whole is a constant focus among policymakers, economists and the like, for the past three decades a secondary concern has been the proportion of GDP allocated to health care expenditures. The reason for this focus is that among developed nations, the U.S.’s proportion of GDP spent on health care has been rising faster than most any other developed nation, while simultaneously the U.S. system is lagging on various measures of health.
The revelation that health care spending continues to be slow is to some a cause for celebration. However, health care spending is by definition included in GDP. Thus, to the extent that any policy or market force reduces health care spending, it necessarily reduces GDP, at least in near term.
GDP and Health Expenditures
Exhibit 1 shows the historical relationship between GDP and nominal health expenditures. The blue area is nominal GDP excluding health care expenditures, and the orange area represents nominal health expenditures. It is clear that health care has been consuming a larger portion of GDP over time. In 1960 national health expenditures accounted for 5.0 percent of the $0.54 trillion in nominal GDP in the US, and in 2012 they accounted for 17.2 percent of the $16.2 trillion in nominal GDP. Of course looking at things only in nominal terms can be misleading, because of inflation; a dollar in 1960 could purchase more goods or services than in 2013.
For comparison purposes we include a line on the graph that shows real GDP growth, meaning the GDP growth in a given year is stated in constant value dollars — in this case the value of dollars in 2009.
One argument put forth for why the U.S. has health care expenditure growth beyond that of the rest of the developed nations is that in the U.S. the prices are higher and growing more rapidly. The prior research is convincing that this is a contributing factor, but there are a variety of other dynamics at work that drive differences in national health spending, including income levels, preferences for technology, and disease prevalence (particularly non-communicable disease) among others.
However, there is a mechanical relationship between GDP and national health expenditures which is important for current policy discussions. In the short term, growing GDP and curbing health expenditures are competing priorities. If health care expenditures are successfully curbed, it will take time for this spending to find its way into other sectors of the economy. The point of reducing these expenditures is to improve the long-term fiscal health of the nation, including public budgets since the majority of U.S. expenditures are now publicly financed.
GDP Growth and National Health Spending
In Exhibit 2, we display the difference between nominal GDP growth and national health spending, with economic recessions labelled for reference. What immediately captures one’s attention is that historically GDP growth would have been much lower than it otherwise was during times of economic recession, if not for health spending. Thus, health spending has moderated economic recessions in the past five decades and this moderation is growing over time, as the troughs are getting progressively lower, indicating GDP growth would have been even more negative if health spending were excluded. These two points are often overlooked in the policy debate and contemporary discussions of economic growth. Rather health care spending is often cited as a reason the economy does not come out of recessions faster: hiring workers is expensive in part because the health insurance costs are high and growing.
Note: Data on GDP taken from the Federal Reserve Bank of St. Louis online system. Data on health expenditures taken from the Centers for Medicare and Medicaid Services. Information on timing of recessions taken from the National Bureau of Economic Research.
Indeed as this graph shows, health spending is growing at or above the same magnitude as other sectors of the economy. If it was not, the peaks of this graph would be higher than they are and for longer periods.
The most recent couple of years appear to be a departure from this pattern though. Caution needs to be taken against over-interpreting what is essentially a couple of data points, but GDP growth is currently flagging in part because of the mechanics — health care spending, one of the largest components of the economy, is not growing like it has historically. Many have been predicting a rebound to growth higher than that of GDP, which was in part the reason that Q1 2014 GDP numbers needed the two revisions that resulted in substantial downward changes in the estimates.
Current discussions are focused on the impacts of health spending on GDP for the first quarter of 2014 because of the large second revision that was driven by health spending changes. Our analysis indicates that GDP growth net of health spending would have been higher as early as 2011, and was on course for a typical post-recession pattern. This trend continued into 2012. This time though, it reached its highest level since 1960. Final numbers are not in for 2013, but it appears that GDP growth net of health spending was even higher than 2012.
Important Policy Questions
The first key question inspired by these trends should be: Will this current pattern continue? One indication of sustainable reduction of health care spending growth is the extent and composition of the individuals covered under health insurance expansion. All else equal, insurance increases health care use because it reduces the cost faced by the consumer at the time they use the service. If insurance take-up under the ACA is concentrated among those with deferred health service needs, then we should see health spending rising soon. This may help GDP numbers, but in the long run misses the fiscal health point of reducing health spending growth.
Another indication of sustainability is the health insurance plans being taken up under the expansion or shifted to by employers as a cost-cutting measure. Recent numbers suggest that enrollment in high deductible health plans is increasing, up to 17.4 million in January of 2014 from 15.5 million in 2013 and 13.5 million in 2012. High deductible plans expose individuals to increased cost-sharing, which in theory should induce more conscientious use of services, potentially reducing overall expenditures.
A third indication of whether or not the current slow growth of health care can continue would be changes in the efficiency of the health care delivery system. If the U.S. health care system is becoming more efficient, meaning improvements on either or both of the quality and cost dimensions, this implies reductions in employment in the health care sector, and/or moves toward lower wage workers to perform skill appropriate tasks. Both the ACA and 2003 Medicare Modernization Act included programs that create incentives for providers to be more efficient.
The Medicare Modernization Act introduced the recovery audit contractor program, which was rolled out nationally in 2010. This program resulted in the Centers for Medicare and Medicaid Services recovering $2B in inappropriate payments in FY 2012 alone. The ACA included the value-based payment and hospital readmissions reduction program, both of which are intended to improve the quality of hospital care and reduce hospital utilization. If these programs are effective, then there will be less demand for hospital-based care, which represents a large portion of health spending.
The second question is: How should this inform the political debate? To assess the health of the economy in an era where health care spending growth has departed from its historical patterns, it would be better to consider GDP growth net of health care spending, and health care spending as separate metrics. In the short term, flagging health care spending will reduce GDP. It may even lead to higher than expected unemployment if the growth in health care spending continues to abet. In the long term, having a more efficient system frees up resources. The reallocation of these resources can and should be used to reduce government debt and spur private investment in other productive sectors.
The immediate temptation is to hoist the woes and successes upon a particular party or administration. Despite the political spin on either side, it behooves us to mind the long-term reasons for reigning in health care spending, while minding the indicators of whether it will continue