Healthcare costs are moderating. For many years cost growth has exceeded GDP by a meaningful margin, causing National Health Expenditures (NHE) to grow as a percent of GDP. Economists track this as excess cost growth, the difference in cost growth per capita and GDP growth per capita, Here's a chart showing the trend in excess cost growth:
The ECG (Excess Cost Growth) began to moderate before the Recession; turned negative during the Recession; surged back for a short time early in the recovery; and has moved back down to the 0.0 - 0.5% range in the last two years.
What will the ECG rate be going forward? This is a big deal, because long term budget projections for Medicare and Medicaid are founded on this rate forecast, and these two Mandatory Spending areas drive the entire Government Budget Forecasts. If ECG stays at 0.5% or less, we have no long term debt or entitlement problem. Debt to GDP levels will gradually decline from the current mid-70% level to the 50% level and below.
Let me say this clearly again: If ECG stays at its 2009-2013 level, we have no debt or long term entitlement problem. Can you imagine how this would change the political conversation if this becomes the official forecast?
So what are the chances of this major miracle happening? Pretty good, I believe; and studies are beginning to be done investigating the possibility that the cost slowdown is not just recession based, that there might be something structural going on, that could give us huge budget relief going forward. A few examples:
- A study published in the May issue of Health Affairs titled "The Slowdown in Healthcare Spending in 2009-2011 Reflected Factors Other than the Weak Economy and Thus May Persist".
During and immediately after the recent recession, national health expenditures grew exceptionally slowly. During 2009–11 per capita national health spending grew about 3 percent annually, compared to an average of 5.9 percent annually during the previous ten years. Policy experts disagree about whether the slower health spending growth was temporary or represented a long-term shift. This study examined two factors that might account for the slowdown: job loss and benefit changes that shifted more costs to insured people. Based on an examination of data covering more than ten million enrollees with health care coverage from large firms in 2007–11, we found that these enrollees’ out-of-pocket costs increased as the benefit design of their employer-provided coverage became less generous in this period. We conclude that such benefit design changes accounted for about one-fifth of the observed decrease in the rate of growth. However, we also observed a slowdown in spending growth even when we held benefit generosity constant, which suggests that other factors, such as a reduction in the rate of introduction of new technology, were also at work. Our findings suggest cautious optimism that the slowdown in the growth of health spending may persist—a change that, if borne out, could have a major impact on US health spending projections and fiscal challenges facing the country.
- CBO Working Paper, published in August, 2013, just prior to CBO's release of the Long Term Budget Outlook in September, 2013, titled "Why has Growth in Spending for Fee-for-Service Medicare Slowed?" Here's the Abstract:
- Another Health Affairs Study from May, 2014 titled "If Slow Rate of Healthcare Spending Persists. Projections May be Off by $770 Billion". The Abstract:
Despite earlier forecasts to the contrary, US health care spending growth has slowed in the past four years, continuing a trend that began in the early 2000s. In this article we attempt to identify why US health care spending growth has slowed, and we explore the spending implications if the trend continues for the next decade. We find that the 2007–09 recession, a one-time event, accounted for 37 percent of the slowdown between 2003 and 2012. A decline in private insurance coverage and cuts to some Medicare payment rates accounted for another 8 percent of the slowdown, leaving 55 percent of the spending slowdown unexplained. We conclude that a host of fundamental changes—including less rapid development of imaging technology and new pharmaceuticals, increased patient cost sharing, and greater provider efficiency—were responsible for the majority of the slowdown in spending growth. If these trends continue during 2013–22, public-sector health care spending will be as much as $770 billion less than predicted. Such lower levels of spending would have an enormous impact on the US economy and on government and household finances.
And here's a forward Spending graph, showing the divergence in current healthcare cost trends and the official 2013-2022 forecast:
- And from the layman's perspective, a remarkable writeup on October 13, 2013, by New York Times op-ed writer, Bill Keller, titled "Obamacare: The Rest of the Story". Keller documents the transformation underway in healthcare, as providers move away from fee-for-service and towards new, more accountable, more cooperative, more information-sharing-intensive ways of delivering healthcare. Will quote Keller at length:
What you may not know is that the Affordable Care Act is also beginning, with little fanfare, to accomplish its second great goal: to promote reforms to our overpriced, underperforming health care system. Irony of ironies, the people who ought to be most vigorously applauding this success story are Republicans, because it is being done not by government decree but almost entirely with market incentives.
Using mainly the marketplace clout of Medicare and some seed money, the new law has spurred innovation and efficiency. And while those new insurance exchanges that are now lurching into business will touch roughly 1 in 10 Americans (the rest of us are already covered by private employer plans or by government programs like Medicare), these systemic reforms potentially touch every patient, every taxpayer.
“This is the 90 percent of the story that doesn’t make the headlines,” said Sam Glick, who follows health care reform for the Oliver Wyman consulting firm.
Since the Affordable Care Act was signed three years ago, more than 370 innovative medical practices, called accountable care organizations, have sprung up across the country, with 150 more in the works. At these centers, Medicare or private insurers reward doctors financially when their patients require fewer hospital stays, emergency room visits and surgeries — exactly the opposite of what doctors have traditionally been paid to do. The more money the organization saves, the more money its participating providers share. And the best way to save costs (which is, happily, also the best way to keep patients alive) is to catch problems before they explode into emergencies.
Thus the accountable care organizations have become the Silicon Valley of preventive care, laboratories of invention driven by the entrepreneurial energy of start-ups.
These organizations have invested heavily in information technology so they can crunch patient records to identify those most at risk, those who are overdue for checkups, those who have not been filling their prescriptions and presumably have not been taking their meds. They then deploy new medical SWAT teams — including not just doctors but health coaches, care coordinators, nurse practitioners — to intervene and encourage patients to live healthier lives.
Advocates of these reforms like to say that they are transforming medicine from the treatment of disease to the treatment of patients — and ultimately the treatment of populations.
The CBO will eventually catch up. In fact, they have moved part way there - with "there" being forecasting the cost trends of the past five years, all the way out into the future, instead of saying - as they are now - that these low cost growth trends will persist until 2018, then, as the economy comes back to life, we will move back to ECG of 1.5%. Let's go to CBO and see what we have:
- First, the ten year projections - comparing the Budget and Economic Outlook: 2010-2020 to the most recent Budget and Economic Outlook: 2013-2023, comparing the nine years the two forecasts have in common - 2012-2020, we see that the later projections are $1.068 trillion lower than the forecast made by CBO three years earlier. About half of these savings come from ACA provisions that were not in the first, January, 2010, forecast. The other half - at least $500 billion - represent the mostly "unexplained" cost slowdown the CBO Working Study authors (referenced above) were pointing to.
- The Long Term Budget Outlook also has moved part way to incorporate changes to reflect the cost slowdown - The 2013 Long Term Budget Outlook makes a number of changes to healthcare (Medicare/Medicaid) forecast assumptions that were included in the The June, 2010 Long Term Budget Outlook. Specifically, the current Long Term Budget Outlook shows cost moderation projected through 2018, then costs begin to ramp up, hitting 1% ECG during the 2020s' and 1.5% after 2030. The 2010 Long Term Budget Outlook used 1.7% ECG throughout. On the other hand, the current Outlook takes theACA-mandated Medicare provider productivity requirement out of the forecast in 2030 and beyond, following the CMS report that felt this would be too onerous for hospitals, skilled nursing facilities, and other providers (excluding doctors). Here's what comes out of these assumptions - moderation in spending through 2018, then a steady and sure upward trend that turns the debt moderation trend around, and moves it in a continuous upward direction:
Here's what the same report says is needed to put us on an even keel:
The above chart means that if, beginning in 2015, we can take .8% out of forward spending, or put the same amount into new revenues, our Debt/GDP ratio will stay constant, and our finances would be generally perceived to be on a sustainable basis. To see the progress we have made since 2010, here's the same chart, taken from the 2010 Long Term Budget Outlook:
As you can see, our hurdle is 4% lower than it was in 2010: there has been significant spending cuts, the reinstitution of the payroll tax, and the end of the Bush tax cuts for those making more than $400,000. So how do we handle the final .8%? A Budget deal, where new revenues are traded for entitlement cuts and the sequester is adjusted or eliminated, might help, or it might not, depending on how much new spending is added back for infrastructure, pre-K, and the like. In any case, a Grand or even Mini-Budget Bargain, though possible, still seems like a long shot.
Healthcare costs are where the needed new money, the final .8% will come from. And many analysts think this reduction in long term spending is already "baked into the economic pie".
What's happening to cause healthcare costs to moderate is not going away. Providers are moving away from the old fee-for-service model. Accountable care organizations. Bundled payments. Coordinated care. Making a huge commitment to Electronic Medical Records. Developing quality measures that can be rewarded. Finding ways to measure savings - not from reducing price, but from lowering utilization of the medical system and complexity of treatment plans, i.e., getting rewarded for having patients stay healthy and not needing the system, or when they do, using fewer complex tests.
This is happening. Right here. Right now. People are just starting to pay attention; and as consensus builds that this is what is going on, that the cost slowdown is not mostly economy related - then we will see the Long Term Budget Outlooks adjusting the spending curve downward. Here's a simple, yet clear example from Ezra Klein at Washington Post's Wonkblog:
It's over. The Budget Wars are over. Not in point of politics, but in terms of substance. The country is on solid economic footing. The CBO, if not in 2014.possibly in 2015 will acknowledge the effects of the transformation in healthcare delivery - one that began before the Recession, but has been greatly aided by the ACA - and bring the long term healthcare cost curve down the .8% required to stabilize our long term debt picture.
This is a huge victory for Government, not as Manager, but as policy vision and incentive setter in ways that allow the huge assortment of actors to gradually begin to coordinate their actions and then move towards a desired goal, a cherished outcome.
The GOP has been panicked that the Government would "take over" the healthcare system. Not so. It has followed what the provider marketplace was already doing - moving away from fee-for-service - and has established this as the new North Star. Incentives have been provided. The ACA puts in place an entire structure of testing to see what works, and then lays out a mechanism to ensure that what works can be scaled up, and not blocked politically(IPAB).
When a System accepts a New Identity - in this case, the Identity would be Coordinated Accountable Care - and incentives are put into place to encourage movement towards this new North Star, then highly complex systems, sometimes very quickly, begin to move towards the new North. This is what is happening. It's a triumph for effective Government, acting as Vision setter ("A man on the moon by the end of the decade - JFK) and incentive provider, not Manager or hyper-Controller.
What's happening is a triumph for Obamacare, for Obama, and for all of us. It's part of the death knell sounding for the GOP as an effective opposition in their current 100% anti-Government form.
The country is on solid financial footing. It is time to invest and grow.