The healthcare spending slowdown

Last week, while attending Modern Healthcare's Women Leaders in Healthcare Conference in Nashville, I had the opportunity to discuss recent healthcare spending trends with the executives in attendance, as well as with some of the top leaders of the nation's for-profit hospital chains, which cluster around Music City.

When asked for their analysis of the slowdown—overall healthcare costs have increased no faster than the rest of the economy the past three years—those officials offered similar reasons and usually in the same order. First, the lingering anxieties from the Great Recession are still leading many people to eliminate discretionary healthcare spending from their household budgets.

Second, employers' accelerating shift to high-deductible and high-copayment insurance plans are forcing healthcare consumers to be more cost-conscious because they are spending more of their own money. Third, there has been a structural shift in the locus of healthcare delivery with more being delivered in outpatient settings and less in more expensive hospital settings.

Finally, and this is often said with a shrug, the delivery system reforms encouraged by the Patient Protection and Affordable Care Act and the increasing emphasis on quality and safety are starting to have an impact on overall costs. Suffice it to say that there is a high degree of skepticism about that latter claim.

Some leaders pointed to straws in the wind suggesting the recession-driven slowdown may be coming to an end. Job growth, while not robust, continues to post fairly solid monthly gains. While unemployment remains high by historical standards, people who are employed are beginning to feel a bit more secure about the future, which can be seen in the pickup in consumer spending in other sectors. If the future resembles the past, discretionary healthcare spending will soon follow suit.

Moreover, next year, millions more Americans will have health insurance because of reform. Even if the number of people who sign up on the new exchanges or get coverage through Medicaid turns out to be well below initial expectations because of uneven implementation across the country, almost everyone agrees the newly insured will bump up demand as they seek out routine and preventive services for the first time and take care of long-delayed problems.

But it would be a serious mistake if health system officials began anticipating major new revenue streams based on an improved economy or a better insured population. That's because when it comes to healthcare, public policy matters.

It has often been said that Medicare drives payment policy, and what happens in CMS spending is a fairly good proxy for what happens in the rest of healthcare. There's no doubt total Medicare spending is going to surge in the years ahead as the 77 million-strong baby boomer generation moves from private insurance to public coverage.

Yet Medicare beneficiaries—who are mostly retirees—are much less affected by the economy when it comes to healthcare spending. And if you look at CMS spending on hospitals and physicians per beneficiary, which corrects for the rising number of retirees, spending growth the past few years has been the slowest in decades (See chart). Only in the late 1990s after Congress imposed caps on spending in the Balanced Budget Act, did Medicare spending take a sharp and, as it turned out, temporary dip.

Will history repeat itself (can you say “SGR fix”)? This is where the delivery system changes contained in the ACA come in. It's not just the experiments in accountable care and bundled payments that are driving change. It is the stepped-up efforts at rooting out fraud and abuse; it is the penalties for excessive readmissions; it is the rewards for higher quality.

Taken together, the ACA delivery system reforms have significantly shifted the national discussion among healthcare leaders. They are now universally focused on improving quality while lowering costs.

CMS Administrator Marilyn Tavenner told conference attendees last week that lowering costs will be her agency's primary concern during the remainder of her and the Obama administration's time in office. It would literally require an act of Congress to change the current trajectory.

Follow Merrill Goozner on Twitter: @MHgoozner