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New Report: Health Care Costs Are Escalating Much More Slowly

But still not clear how long slowdown will last—or why it's happening

Joe Raedle/Getty Images

We’re making progress on controlling the cost of health care. We might even be making a lot of progress, although it’s too soon to tell.

That’s the main takeaway from a big new report by actuaries at the Centers for Medicare and Medicaid Services, which is known as CMS. It’s a projection of health spending over the next decade, which they publish every year at this time in the journal Health Affairs. And as economic reports go, it’s a pretty important one. When health care costs are rising more quickly than the rest of the economy, as it has for most of modern American history, all of us pay for it. It means we are paying some combination of higher insurance premiums and out-of-pocket expenses, along with higher taxes to support government insurance programs.

The easiest way to measure health care spending, relative to the economy, is to compare how fast each one is increasing. In wonkspeak, that’s growth in National Health Expenditures (NHE) versus growth in Gross Domestic Product (GDP). Between 1990 and 2008, the gap between them was roughly two percentage points. But over the last few years the divergence has dwindled. Last year, according to the CMS report, the difference was just zero-point-six percentage points. That’s a pittance and it means we’re saving money, as a society and individually.

Going forward, CMS expects health care spending to start rising more quickly, as long as the economy keeps recovering. Over the next decade, CMS actuaries predict, the difference between NHE and GDP will average 1.1 percentage points, reaching up to 1.5 percentage points in 2023. But that will still be lower than the recent historical average.

 Rising health care costs, then and now

Exactly why spending on medical care has slowed down is the subject of considerable debate among economists. Over time, health care spending tends to track the economy as a whole, though sometimes with a slight time lag, since people who have less money (or are less insurance) are less likely to seek out medical care. But most experts think other factors are also at play. Some point to changes in private insurance—specifically, the fact that people are paying more and more out of their own pockets, in the form of co-payments and deductibles. Others note that per capita spending in Medicare, the government’s insurance program for the elderly, is also rising slowly. (Margot Sanger-Katz from The Upshot just had a very good article on that.) That would suggest some changes in the law, like lower payments to hospitals and incentives for more efficient care, are also having an effect.

Conservatives love the part about changes to private insurance, while liberals love the part about changes to Medicare. The CMS actuaries, like most health economists I know, think both are playing a role. But the CMS actuaries are wary of assuming these changes will be too big or long-lasting. They seem particularly cautious when it comes to assessing the impact of “payment reforms” in the Affordable Care Act—changes in the way Medicare pays for services, designed to encourage hospitals to deliver care more efficiently.

Are the CMS actuaries right to be so skeptical? There’s no way to be sure, obviously. Plenty of experts, including those at Altarum and the Kaiser Family Foundation, have predicted health care spending would rise more quickly once the economy recovers. And savings have certainly proven ephemeral in the past.

But the slowdown in Medicare spending (which has little to do with the economy or changes to private insurance) is a powerful indicator that health care really is becoming a more efficient enterprise. “The evidence for fundamental health system change grows stronger by the month,” says David Cutler, the Harvard economist and widely respected expert on health care spending. “CMS is skeptical about the lasting power of many of these pieces of evidence. I, and others, remain more optimistic.”

Keep in mind that CMS actuaries are famously conservative. In the past, they’ve tended to overestimate how much spending will rise—not because they’re imprecise or biased, but because they tend to err on the side of caution. In a conference call Wednesday, several actuaries made clear they weren’t discounting the possibility that the health care industry is becoming more efficient. One actuary said “Right now it is still too early determine” how much the health industry has changed. Others expressed similar sentiments.

“If the payment reforms have the kind of effect advocates of them expect, these projections could turn out to be conservative,” Larry Levitt, senior vice president at the Kaiser Family Foundation, told me later via e-mail. “The actuaries tend to take a wait and see approach to new developments where there is little evidence as to what effect they’ll have. We are in somewhat unchartered territory here.”

Also keep in mind that, even if the conservative/skeptical take from CMS is correct, the future of health care spending looks better than the past, when it was increasing at faster pace and there was no reason to think it’d slow down anytime soon. How big a difference does that make? To quantify that, I asked Levitt to run some numbers, comparing CMS estimates from 2010 to the estimates from today. As of 2019, the average American would be saving $1,588 a year. It’s impossible to say how much of that would reflect the economy versus system-wide changes in medical care, or how much the latter would be a product of the Affordable Care Act. But the difference would be significant.

The caveat to all of this, as Levitt was quick to point out, is that CMS assumes officials have the mettle to stick with Obamacare’s reforms and that providers remain serious about reacting to those reforms by finding ways to deliver care more efficiently. “From a policy standpoint, it’s not the time to take our foot off the brake and put it on the accelerator,” Levitt says. “We have to remain vigilant about health costs just to maintain the gains so far.” Also remember that as long as health care spending is rising even a little bit faster than the economy is growing, it's still taking an ever greater share of our incomes. The impact may be smaller than expected, but it's still real—and will require finding some way to pay for it.

Update: I added that last line, which I had intended to include in the first place.