THCB

Good News From CMS at Last? Maybe Not

flying cadeuciiI’ve been looking at the latest CMS national healthcare expenditure data and the accompanying commentary by CMS staff. The 2013 numbers are a pleasant surprise, showing for the fourth straight year minimal increase in healthcare spending relative to economic growth. The CMS staff commentary, however, suggests that such good news may not be repeated:

The key question is whether health spending growth will accelerate once economic conditions improve significantly; historical evidence suggests that it will.

Not everyone agrees. Apparently disliking such a pessimistic view, the New York Times followed its initial analysis of the CMS data (“Good News Inside the Health Spending Numbers”)  with a piece by David Leonhardt  (“The Health Cost Slowdown Isn’t Just About the Economy”)  challenging the CMS staff’s assumption that much of the spending slowdown was due to the recession. He suggests instead that the slowdown is due primarily to changes in the healthcare system—notably those resulting from the Affordable Care Act.

So, should we be cheering? Or not?

Looking at the numbers, it looks as if the four “lean” years of modest spending increases will be bracketed by some “fat” years, with jumps in spending relative to GDP growth. In 2008 and 2009, healthcare spending growth exceeded GDP growth by 3 percent and 6 percent respectively, while looking to the future, CMS actuaries project that in 2014 healthcare spending growth will exceed the GDP increase by 2.4 percent, followed by an ongoing trend of about 1.1 percent above GDP growth. As CMS staff commented, this is similar to the pattern around previous recessions, in which strong growth was followed by a slowdown as consumers put off medical care, followed in turn by more growth. (It’s also one that will lead to healthcare consuming twenty percent of GDP by 2025.)

Leonhardt questions this, arguing that the recent pattern is different from that of recessions in the 1970s and 1980s, and much closer to that of the mid-1990s when the managed care “boom” slowed spending until the rebellion against HMOs took hold and spending resumed its upward trajectory. In fact, the comparison is closer than Leonhardt suggests. In both cases, a recession was followed by a disruption in the healthcare system—in the 90s, by HMOs, and now by the ACA.

Where Leonhardt may be especially unrealistic is in assuming that ACA-related cost controls will escape the pushback efforts that typically follow such disruptions.  After four years of minimal growth, pharmaceutical and medical technology stockholders will press for higher returns, hospital boards will be less willing to abandon expansion plans, and individual providers will be loath to see the end of the past forty years’ income trend. It’s a reasonable assumption that our supply-driven healthcare system will see a substantial jump in spending.

How substantial? It’s possible that even CMS may be being too optimistic. The just-ended recession was the worst in more than fifty years, so the catch-up pressure may be greater than in the past. At the same time, even with higher-deductible plans, our system is still one in which the vast majority of consumers are insulated from most of the costs of care and unwilling or unable to question those costs.

There’s another feature of the CMS data that should concern us. For all the apparent good news in the 2013 numbers, healthcare spending growth has never dropped below the current rate. Even in the depths of the recession, spending continued to increase significantly faster than inflation. Looking ahead, the combination of always increasing healthcare spending and GDP growth subject to world economic events could produce some very unhappy results. Unless we make some fundamental changes to our healthcare system, another recession, even one less severe than the last, could push healthcare spending above twenty percent of GDP a lot sooner than 2025.

Roger Collier was formerly CEO of a national health care consulting firm. His experience includes the design and implementation of innovative health care programs for HMOs, health insurers, and state and federal agencies.  

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