Slower growth in healthcare spending is supposed to boost the general economy in ways similar to the current drop in oil prices, which retailers hope will save them from a disastrous holiday shopping season. So why are people cheering the latter but not the former?
There's a simple answer to that question: Average paycheck-drawing Americans, more of whom are being thrown into high-deductible insurance plans, still aren't benefiting from the healthcare spending slowdown, while better prices at the pump immediately translate into more money in peoples' pockets.
Last week, economists at the CMS revealed that overall spending on healthcare in 2013 rose only 3.6%, its slowest rate of growth since the agency began tracking the numbers in 1960. Healthcare as a share of the economy remained at 17.4%, no different than in 2009, the last time the sector increased its year-over-year share.
The healthcare wing of the dismal profession, as well as the CMS bean counters, continue to see clouds on the horizon. Healthcare spending likely will accelerate over the next few years as more baby boomers enter their high healthcare cost years. Also, last year didn't include any of the costs of the healthcare reform law's private insurance and Medicaid expansions, which only began flowing to providers in 2014.
But there are powerful countertrends that should keep spending over the next few years well below the norms of most of the past half century, when the sector routinely grew one-and-a-half to two times faster than the rest of the economy.
Delivery-system reforms and changing medical technologies are beginning to have a major impact on spending. Expensive hospital admissions are on the decline. More care is being delivered in outpatient and ambulatory surgical centers.
Better care coordination is reducing unnecessary readmissions at many hospitals, which are now in their third year of absorbing Medicare penalties when they have excessive readmission rates.
Unnecessary harm is finally on the downswing, in part because of the prospect of financial penalties imposed by the CMS as part of healthcare reform. Fewer unforced errors in healthcare translate into higher quality, lower costs and better outcomes.
Routine use of the healthcare system also appears to be falling as more people get moved by their employers into high-deductible health plans. It will be important to watch this development closely to see if the care-avoidance choices made by financially strapped consumers translate into worse outcomes.
The most famous study on this point—from the RAND Corp. in the 1970s—suggested that healthcare consumers are just as likely to eliminate necessary care as unnecessary care when left to their own devices. But that was long before the era of the Internet, Dr. Google and greater pricing and quality transparency (limited as it is). The jury is still out on whether having “more skin in the game” will be a net positive or negative for healthcare outcomes.
So to return to the original question: Why aren't more people happy about the slowdown? In short, it's because they are still experiencing higher out-of-pocket costs. Ditto for employers: the insurance rates they have to pay are still rising, just not as fast as before.
The numbers come right from the CMS report. In 2013, spending on private health insurance grew only 2.8%, down from 4% in 2012. For employers, that's still an increase they otherwise could have spent on wage increases.
Out-of-pocket spending by households, meanwhile, grew at 3.2%, down from 3.6% in 2012. While that is modest by historical standards, it is still higher than recent average wage increases.
Most Americans in this joyless economy are losing ground. And they still are spending more of their shrinking paycheck on healthcare than before. Despite all the work that's gone into holding healthcare spending in check, the sound you hear this holiday season is no hands clapping.