What Is Sustainable Health Spending?

There is broad agreement that historical rates of increase in health spending are “unsustainable”, and we must therefore find ways to bend the health care cost curve. However, there is surprisingly little consensus – and not even much being written – about what growth rate would be “sustainable”?  Defining sustainable growth and establishing a credible target is one of the top research priorities of our Center. We have put a lot of energy into providing more timely estimates of health spending and having a target for comparison is a key next step.

In this blog, the first in a planned series, I lay the groundwork needed to estimate sustainable health spending growth rates.  I begin with a definition of sustainable health spending that I hope you will find intuitively appealing, even if it does not match your own perspective. I then identify key stakeholders affected by health spending increases and who, in the absence of the Affordable Care Act (ACA), would have their own particular sustainability thresholds. Next, I argue that under ACA, the federal government blunts the impact of health spending growth on most other stakeholders and, in so doing, focuses the sustainability question more fully on its ability to raise the tax dollars required to meet its ACA commitments.

Defining “sustainable” health spending

I consider the nation to have achieved sustainable health spending when the projected growth path of spending is within what the nation is willing and able to pay. Note that this definition introduces elements of choice into the determination of sustainability. If there is an absence of willingness to pay, the spending will be unsustainable even if there is ability to pay.

Sustainable in whose eyes?

In order to develop estimates of sustainable health spending under this definition, we must have a sense for what the nation is “willing and able” to pay. This, in turn, is complicated because the “nation” consists of a number of stakeholders with various exposures to health care costs and various levels of willingness and ability to pay.

Overall health spending growth affects:   (1) federal government payments for Medicare, Medicaid, and other federal health programs; (2) state government payments for Medicaid; (3) employer and employee payments for health care premiums; and (4) individual out-of-pocket health care premiums and payments. In the eyes of federal and state governments, spending growth becomes unsustainable when outlays become greater than what can be raised in tax revenues. (This is especially true for states who must balance their budgets. The federal government can run deficits but only so much for so long).

For employers committed to offering health insurance, spending growth becomes unsustainable when it drives premiums to a level where dropping coverage is necessary in order to compete in the marketplace. For individuals, spending growth may make insurance unaffordable or may weaken coverage to the point where out of pocket costs become unaffordable (inadequate insurance – sometimes called underinsurance). These multiple stakeholders, each with different sustainability thresholds, complicate the determination of what might be an overall sustainable rate of growth in health spending.

Enter the Affordable Care Act

The ACA changes the way in which spending growth affects each of these stakeholders and thus alters the dynamics of the sustainability question. Under ACA, individuals are to be provided access to insurance that is both affordable (through premium support) and adequate (through actuarial standards applied to policy designs). As long as the government lives up to this commitment, individuals will be able to afford adequate insurance regardless of the rate of growth in health spending. Thus, the sustainability of health spending growth is much less of an issue for individuals under ACA. The impact of rising health spending on employers and employees is also blunted by this aspect of ACA in the sense that employers can drop coverage and know that their employees will still have access to affordable insurance (though their internal calculations of whether to offer insurance in light of subsidies, and a pay-or-play mandate, are quite complex). The impact of ACA on state governments involves expansion of Medicaid eligibility to everyone under 133 percent of poverty level. While the federal government will help fund this expansion, states must still cover their share of cost increases over time.

In summary, under ACA, the protections provided by the federal government blunt the effects of health spending growth on most other stakeholders. Consequently, the sustainability of a given rate of health spending growth rests most importantly with the federal government’s ability to meet its commitments under ACA. This, in turn, rests upon the willingness and ability of the citizenry to provide and allocate the necessary tax revenues.

An approach to estimating the sustainable rate of growth in health spending

Let us now turn to the problem of estimating the rate of growth in health spending that would be sustainable under ACA. (It should be understood that this refers to the maximum rate of growth that would be sustainable. There are obviously any number of lower growth rates that would be sustainable). For convenience, let’s discuss spending in terms of its share of Gross Domestic Product (GDP). Thus we wish to determine the rate of growth in the health spending share of GDP that is sustainable. This requires answers to the following three questions:

1) What share of GDP can be raised in federal tax revenues?

2) What share of federal tax revenues must be reserved for nonhealth federal spending?

3) What is the relationship between the health spending share of GDP and the federal health spending share of GDP?

Answers to the first two questions provide projections of the share of GDP available to fund federal health spending. For sustainability, we do not allow actual federal spending to exceed what is funded through taxes so the projected maximum share of GDP devoted to federal health spending is equal to the projected available tax revenues. The answer to the third question translates the projection of federal health spending as a share of GDP into a projection of total health spending as a share of GDP. The rate of growth in this projected health spending share of GDP is the maximum sustainable growth rate given what the citizenry is willing to provide in tax revenues.

In my next blog, I will compute sustainable growth rates in the health spending share of GDP associated with alternative assumptions about tax revenues. I will also compare these growth rates with what few estimates there are from the literature and give some thoughts on why there is such wide variation. I hope you will stay tuned.

Charles Roehrig is a health economist and director of the Altarum Center for Sustainable Health Spending. His column for the Health Policy Forum considers health economics issues and health spending. This post was originally published in the Altarum Health Policy Forum.