A Look At The Growth In Health Care Costs

Earlier this month, the Centers for Medicare and Medicaid Services (CMS) released new estimates for national health spending in 2013, which show the slowest growth rate since we've started tracking health care spending (3.6 percent). It's tempting to declare this a victory against growing health care costs, which have been a thorn in our side for years. But health care is rarely that simple.

First, some historical context: the recent slowdown in growth isn't the first we've ever had. The managed care revolution of the 90s, for instance, saw GDP and health care spending growing in tandem, so health care spending remained steady as a share of the economy. When the dot-com bubble burst, cost growth as a share of GDP returned. The CMS actuaries acknowledge as much, noting that post-recessionary periods see slower growth on average.

Economic factors play a role here as well. It's not just health care spending growth that's been slow — GDP and inflation growth have been sluggish too. As the economy recovers, spending growth will likely begin to climb again along with everything else.

If we're serious about controlling health care costs, we must also address the elephant in the room: hospital spending. Much of our high health care costs can be blamed on high prices charged by monopolistic hospitals. In 2013, it appears that hospital spending growth did fall, both for private insurance and Medicare. Nevertheless, it grew faster than overall health care spending, clocking in at 4.3 percent. Both private insurance and Medicare have been taking measures to reduce hospital use and Moody's has projected that non-profit hospitals are likely to see slightly negative to slightly positive operating cash flow in 2015. But again, it's too early to celebrate. CMS actuaries predict annual growth of 6.2 percent from 2016 to 2023.

Health care's "great moderation" has hit Medicare, too. The story here is a bit different. Cost growth in Medicare should be more isolated from the economy because most beneficiaries are retired, receive a large share of income from social security, and shouldn't change their health care use during an economic downturn. So what should we make of this?

Obamacare supporters have hailed this as proof of the law's success. There may be some truth here, as the actuaries acknowledge — part of the slowdown in Medicare's cost growth has come from changes to how the government pays private plans, and "productivity adjustments" to how traditional Medicare pays doctors. But savings haven't only come from top-down changes.

Looking back to 2008, per-enrollee spending growth from 2008 to 2013 averaged about 1 percent in private plans, compared to 3.5 percent in traditional Medicare. Of course, these private plans aren't perfect — there is evidence that they're overpaid relative to traditional Medicare. But evidence also indicates that these plans offer better quality on some measures, and have the capability of better controlling cost growth.

Medicare's actuaries still project that the program will make up 5.35 percent of GDP by 2023, and that it will pass 6 percent by 2050 — in other words, cost growth is expected to return.

The point of it all is this: Yes, the health care spending numbers look good and have for a few years now. The growth in both health care use and price growth has been slow. But slow growth has come and gone in previous years, and it isn't yet clear whether structural factors have changed enough to keep growth slow over the long term. We should be emboldened by these numbers, but it's far too soon to celebrate.

This piece originally appeared in The Washington Examiner.

This piece originally appeared in Washington Examiner