Well, you can call us foolhardy, because our extensive work with a large number of clients has resulted in a confidence that we understand why health care inflation has slowed over the past few years. Let’s talk this through.
The
preamble
Not to be picky, but before going any further, we have to make a
comment about the routine (and incorrect) use of the term “health care
inflation.” While we are not economists, most of us took a few econ classes in
undergrad, and we learned enough to know that “inflation” is a general increase
in prices as a result of too much money chasing too few goods. What passes for
inflation as it relates to health care is actually increased consumption – in
both quantity and through the consumption of higher priced treatments. In fact,
many health care prices are actually moderating on a unit cost basis, owing to
competitive pressures and patent expirations. People can’t fix what they don’t understand,
and using incorrect terminology doesn’t help. We expect better from The New
York Times, and we bet you do, too. OK, now that we’ve cleared that up…After years of health care costs increasing as a percentage of the gross domestic product, 2009 and 2010 showed a significant slowing down of the health care cost curve. In fact, the total national health care spending growth of less than 4% per year is the slowest annual pace in more than fifty years. If it continues to hold steady at 17.9% of the GDP, there is hope for long term fiscal health for both national and household income, but in order to capture that slowing and replicate it year over year, we have to know why it’s happening.
And, according to the New York Times article, experts have no idea why this is happening.
Is it the recession?
Keeping with the zeitgeist of the
time, the article first points the blame at the recession. The slowdown did
occur during the same time as employer-based insurance options dipped for many
Americans due to job loss. The recession may have made Americans more aware of
health costs, who cut back on non-urgent care while money was tight. Gail
Wilensky, speaker of our “foolhardy” quote, headed Medicare and Medicaid under
President George Bush and believes the dip was caused by decreased income and decreased
wealth during the recession. She fails to mention, however, that the COBRA
subsidy program under ARRA artificially suppressed the number of “uninsured”
you would typically expect when jobs are cut. And the fact these people stayed
insured should have resulted in less of a drop in consumption than typically
found in recessions.
The experts in the article all agreed
that mitigation caused by recession would not be surprising or unexpected.
No, it’s not the recession
(at least not entirely)
But a lot of the data points to a cause beyond the recession. States
that weren’t hit too badly by the recession had some of the most rapid
abatement in health care inflation. And some of the slowed spending
occurred in market segments that shouldn’t have been recession-sensitive, like those
on Medicaid and Medicare.
“The recession just doesn’t account for the numbers we’re seeing,”
said David Cutler, a Harvard health economist and former adviser to President
Obama. “I think there’s much more going on. If you asked me, ‘How confident are
you that this is not just the recession?’ I’d say 75 percent.”
Well, then, is it health
care reform?
The president of the Commonwealth Fund, Karen Davis, makes the case
that health care reform is the cause: “A lot of the big gains have come from
keeping people out of the hospital and the emergency rooms.”
No, it’s not health care
reform (at least not entirely)
While a reduction in those big price-tag claims would account for the
decreased spending, it’s unlikely that health reform has drastically reduced
hospital and emergency room visits at this stage.
As we discussed last week, the high risk pool, PPACA’s interim solution to improve access to health coverage, has low engagement rates, and the uninsured rate has remained steady through 2010. Even for the 18-25 year old age range, the uninsured rate has declined from 28% to about 24% and has now leveled off over 2011.
Additionally, many economists believe costs may go up as tax incentives and new programs come into effect.
Is it… consumerism?
The Times article starts to hint at this option, but it fails to
establish a conclusion. The author discusses the growth of high-deductible
plans, cited as growth from 3% in 2006 to 13% in 2011, and how those plans
impact the way that people think about health care. The author notes, “A broad, bipartisan range of academics,
hospital administrators and policy experts has started to wonder if what had
seemed impossible might be happening — if doctors and patients have begun to
change their behavior in ways that bend the so-called cost curve.”
But we believe there’s no need to wonder. This behavioral change is
well documented, from a recent Reuters article about the growth of
consumer-direction coverage to the RAND study that shows high deductible plans
may reduce spending by as much as 14%.
Our foolhardy proposition
Consumerism, we believe, is the key to
the mitigation of health care inflation. As we pointed out earlier, in all
other aspects of economics, inflation is a rise in cost of goods, but as it
pertains to health care, inflation is a rise in use and engagement. Therefore,
increased health care costs are increased use of the goods. Consumerism has everything to do with slowing health
care spending.
In all segments, people are becoming
more aware of the cost of health care. Insurance plans are becoming less rich,
and people are more price-sensitive. That applies even in the Medicare world,
as retiree health plans start to disappear.
As patients become consumers, they pay
more attention to the market and to the costs of services. A September RAND study shows that
patients with consumer-directed health plans not only reduce their costs
through initiating health care less frequently, but also by reducing costs
after they’ve begun care, sometimes through electing less expensive treatments
or medications.
The past few years have seen a dramatic growth in the
consumer-directed plans and the awareness of health care costs. With that,
people are becoming more aware of their own consumption. Reduced consumption equals
mitigated health care inflation.
We like the way Dr. Drew Altman, the president and CEO of the Kaiser
Family Foundation, sums up the rise in consumer-directed plans: “Well you know,
I think we've been so focused on health reform in Washington, what we have
missed is there is a quiet revolution happening in health insurance out in the
country.”
So how are you engaging in the quiet revolution? Are you helping your
clients implement high deductible plans? And if so, have your clients seen a
decline in health care spending? Is it just a coincidence that the “minimum”
level of an acceptable employer-provided plan mirrors a high deductible health
plan (without HSA contribution)?
This article was first featured in the May 7th edition of our e-newsletter, Directions. If you'd like to receive that weekly email, contact directions@continuoushealth.com. (Your email will never be shared, sold, or otherwise distributed, and you will receive only the type of content for which you sign up.)
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