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Despite the ACA’s Cost-Saving Measures, Modest Increases in Health Care Costs Unlikely to Continue

Written by Roy Albert

Earlier this week, the Kaiser Family Foundation and the Altarum Institute’s Center for Sustainable Health Spending published an analysis of the recent slowdown in health care spending. The study asserts that macroeconomic conditions are the most important factor in determining systematic health care costs.  The analysis concludes that the modest increases in health care spending over the last several years will likely be replaced with higher, more “normal” rates of growth as economic conditions improve.  Greater increases in health spending will in turn lead to continued pressure to contain costs. 

Since the ACA’s enactment, health care costs have increased at a much reduced rate as compared to the previous several decades.  According to CMS, in 2011 health spending in the U.S. grew 3.9% and was 17.9% of GDP (the same proportion of GDP as in 2009 and 2010).  The rate of growth for health care spending in 2011 was significantly below the annual average over the last several decades. 

The Kaiser and Altarum Institute analysis cites two factors to explain over 85% of the variation in health care spending growth rates from 1965 through 2011:

  • Inflation in the current year and inflation in the prior two years.
  • The growth in real GDP in the current year and GDP growth in the prior five years.

Kaiser and the Altarum Institute note that these appear over time (at six-year intervals), which explains how lower levels of health care spending are being seen now even though the recession ended in 2009.  Thus, as the economy improves, we will begin to see the impact of increased costs in the health care system.

One of the central debates in how to achieve enduring, comprehensive health care reform is whether and how to provide coverage to uninsured individuals in a manner that contains costs, or “bends the cost curve.”  The ACA aims to vastly reduce the number of people without insurance, and although there are revenue-raising provisions included in the legislation, time will tell how policy changes will impact overall health care spend.  Only some of the ACA provisions have been fully implemented, with many becoming effective in early 2014. 

Proponents of the ACA have cited various parts of the legislation that may help control costs.  As the analysis by Kaiser and the Altarum Institute points out, these cost-controlling attributes include changes to the delivery system resulting from the creation of Accountable Care Organizations and bundled payments.  State exchanges that will begin offering coverage next year may also result in cost savings and efficiencies.  The ACA also offers a range of revenue-raising provisions to offset the costs of enhanced coverage, including taxes on high cost health plans and payroll and investment income for individuals exceeding certain income thresholds, as well as changes in how reimbursements are made, most notably impacting Medicare Advantage organizations.

While recognizing that the ACA includes some modest efforts to cut costs, the results of the study by Kaiser and the Altarum Institute have led health care executives to conclude that “we still have a spending problem.”  While health care payors, providers, and patients hope for an improved economic outlook, they should continue efforts to focus on cost containment and monitor how health care spending could potentially grow as a result of gains in the overall economy.

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Roy Albert