Over Half The Slowdown Of Health Care Costs Could Be Permanent, Saving The U.S. Over $700 Billion

One of the most important ongoing stories in the realm of budgets and health care economics is the remarkable drop in how much health care costs are projected to grow over the next decade. Back in March, David Cutler and Nikhil Sahni released some preliminary work arguing that, thanks to this slowdown, projections of government spending on health care for the next decade were overshooting by hundreds of billions of dollars. Now they’ve released a more complete paper (gated) with a specific number: if the lower growth rate continues, the federal government could save $770 billion by 2021. Furthermore, Cutler and Sahni concluded that as much as 55 percent of the slowdown has been driven by factors other than the recession.

That last point is especially important. If the slowdown in growth is due to the recession, then it’s temporary. Health care costs will once again rise at their previous rate once the economy recovers, driving health-related spending to ever greater heights and further straining the budgets of both the government and American families. But if the slowdown is due to deeper, structural changes in health care markets, then at least some portion of the slowdown may be long-term. And the government’s projections of future debt and deficits rely heavily on those previous assumptions of high health care cost growth. So if the slowdown sticks, the outlook for America’s fiscal future could improve radically, all without lawmakers cutting a dime.

Here’s Bloomberg with a nice summary:

Cutler’s research compared the U.S. government’s growth projections for health spending from 2004 to 2012 with actual increases in the period. It found that the real growth rate was about half of the government’s prediction, leading to a gap of more than $500 billion in 2012 between the projections and spending.

The paper calculates that the recession accounted for about 37 percent of the slowdown in health costs from 2003 to 2011. Declining private insurance coverage and cuts in payments byMedicare, (USBOMDCR)the government health plan for the elderly and disabled, accounted for another 8 percent and the remaining 55 percent is “unexplained,” Cutler wrote. That’s where the structural changes come in, he said.If the current lower-than-expected rate of growth continues, the country may reap savings of as much as $770 billion through 2021, the research found.

As always, there’s a lot of uncertainty built in here. Another recent study by Kaiser, for instance, suggested that as much as 77 percent of the slowdown is a temporary result of the recession. Also, there’s a lot of complexity in the category of “structural” changes. Some of it’s improvements in the efficiency of health care delivery, quite possibly thanks to reforms in Obamacare that encourage providers to change the way they do business. Other parts of it may be one-time shifts in the market, such as the rise of generic drugs to replace more high-cost brand-name medicines.


The broader point, however, is that there are more ways to balance the budget than just slashing the aid and benefits Americans need to buy. A better-designed health care system could very well deliver lower and more efficient government spending than austerity ever could.