Health spending slows even before reform

January 6, 2010

Health spending is growing slower than it has in 48 years—but that’s better news for businesses and households than it is for governments. Whether health care reform will continue the trend is an open question.

Health spending grew 4.4 percent in 2008, according to an annual analysis of the entire health care sector by the federal Centers for Medicare and Medicaid Services. Health care spending totaled $2.3 billion, or one-sixth of the national economy.

The health burden is most acute for governments. The federal government spent a whopping 36 percent of tax receipts on health in 2008—up from 21 percent during the previous recession in 2001. State and local governments are spending, on average, 24 percent of their budgets on health.

By contrast, private household spending on health rose from 5.3 percent of income in 2001 to 5.9 percent in 2008. Private businesses spent 7.9 percent of total payroll on health benefits in 2008, up from 7.5 percent in 2001.

“Health care spending is often thought to be somewhat insulated from the immediate impact of a downturn in the overall economy,” wrote the authors of the report. “However, the current economic recession appears to have exerted considerable influence on the health sector in 2008. … In contrast, federal health spending growth accelerated in 2008.”

The federal government pumped up its own bill by using the 2009 stimulus bill to retroactively shoulder some of state governments’ costs for the Medicaid program. The percentage of its spending on health care also rose because a slumping economy reduced tax revenue.

The health reform bills passed by each house of Congress are projected to reduce the federal deficit slightly over 10 years and perhaps more after that. But whether they can actually reduce overall health spending is being seriously debated right now by health policy experts, both in Indianapolis and elsewhere.

The bills would create an independent commission to suggest cost-saving measures that Congress would have to approve or reject without making tweaks. They would create various pilot programs within the Medicare program to encourage cost-saving innovations by doctors and hospitals.

Those modest measures won’t fix out-of-control health spending, acknowledged Eric Wright, director of the Center for Health Policy at IUPUI. But he said they are the necessary first step in a process he thinks will cut costs.

“It’s like navigating the rapids,” he said. “You can’t figure out where your next turn is going to be until you get around the first turn.”

Dr. Atul Gawande expressed a similar idea in a December article in The New Yorker. He likened the cost-cutting commission and pilot programs in the health reform bills to the beginnings of the agricultural extension service in the early 1900s.

The local extension offices helped farmers try out new methods that, when proven and spread to other farmers, made U.S. food production incredibly efficient. This slow-moving, bottom-up process helped Americans reduce their average food bills from 40 percent of income in 1900 to 24 percent in 1930 to 8 percent today.

The same can happen in health care, Gawande argued. His article can be read here.

But not everyone agrees. Alain Enthoven, a health economist at Stanford University, said Gawande’s analysis was deeply flawed. Unlike the farmers, he wrote, “the Medical Industrial Complex does not want such pilots and often strangles them in the crib.”

He said health reform must first set up a system in which individual consumers—not their employers—can choose cost-efficient health plans and medical care. Only then will the health care industry have the incentive—as the farmers did—to produce cost-efficient health care.

Enthoven’s blog post can be read here.


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