After years of skyrocketing costs and growing anguish, health care costs have stopped growing.
In 2000, about 11 cents of every dollar Americans earned was spent on medical costs. By 2009, that had risen to over 14 cents, an increase of nearly 30 percent. The growth was even more dramatic in Massachusetts, reaching 16 cents.
Yet, since 2009, there’s been no further growth, not in Massachusetts or the United States. If we can continue to hold down costs, the potential benefits are enormous. It could solve our long-term budget problems and put more money in people’s pockets.
Have health care costs really stabilized?
Not only have they been stable, but since 2009 nationwide health care costs have actually declined slightly. And just this week the agency that monitors health care costs in Massachusetts reported a decline here as well. Bay Staters actually spent less of their money on health care in 2013 than they had in 2012.
What caused the turnaround?
One way — sadly, one pretty effective way — that we’ve limited the growth of health care costs in recent years is by having a massive recession. It turns out if you increase the number of unemployed workers, reduce the value of everyone’s homes, erode hard-earned savings, and squeeze employees’ pay, people end up spending less of their money on health care.
Still, there’s more to the story than just the economic downturn. As the job market has improved and the economy has started to grow, health care costs have remained steady. Here are some of the leading explanations:
• The Affordable Care Act (a.k.a. Obamacare). This legislation included many different initiatives to limit health care cost growth, including: creating health care exchanges where insurers compete on price; taxing high-priced insurance plans; promoting so-called “Accountable Care Organizations,” which are like less rigid HMOs; and lots of other things.
• Changes at hospitals. Sometimes it’s not a new rule that makes the difference, but the expectation of a new rule. Doctors and hospitals understand that in the future they’re likely to be assessed and paid based on the quality of the care they provide, rather than the number of tests they perform. So they’re already putting in place programs that improve efficiency and reduce unnecessary treatment.
• Cost-sharing. Co-pays, deductibles, and other out-of-pocket costs have been rising in recent years. That gives consumers more “skin in the game” and it could be shifting people’s decisions about when to go to the doctor and whether to get expensive tests.
Is there anything unique happening in Massachusetts?
Massachusetts passed an aggressive health care cost control bill two years ago, setting a ceiling for health care cost growth. Each year, the state tells hospitals, physicians, and other “health care entities” that they can’t increase their costs by more than a certain amount. If they miss that target, the state will find ways to help them, and also to shame them by listing their names on its website.
For the first year, the target was 3.6 percent, and on Tuesday we learned that spending growth came in well below that, at just 2.3 percent. Given that cost growth have been slowing all across the nation, it’s unclear how much credit the Massachusetts law deserves, but at the very least it’s another signal to hospitals and insurers that their practices are being monitored and that health care costs have become a state priority.
If we spend less, will we get worse care?
The big, underlying assumption behind these cost-control efforts is that the US health care system is so riddled with waste that we can cut costs and still improve care. One reason to think this is true is that every other country manages to spend much less and get similar outcomes, if not better ones.
The chart below provides a good example. It shows how much money different countries spend on health care (per person) and also how long people in that country tend to live. What you see is that life-expectancy in most European countries is higher than in the United States, even though we spend twice as much on health care. If Massachusetts were a country, we’d have the highest health care costs in the developed world, yet life-expectancy in the Commonwealth is still just average.
The money we save, where would it go?
When people talk about the long-term fiscal crisis in the United States, they’re mostly talking about health care costs. If we can get health care costs under control, then the deficit problem largely disappears. These two charts from the Center on Budget and Policy Priorities tell the story. The first, from 2010, shows that virtually all of the projected growth in federal spending was health care related. The second, more recent, shows how much the projections have improved now that health care costs are growing slower than our economy (the impact on the state budget is slightly different).
Individuals, too, would benefit from lower health care costs, including in the form of higher wages. Think of it this way: businesses have a certain amount of money that they can use to recruit and retain employees. Some of that money gets paid out in the form of wages or salary, but another big chunk is used to provide health insurance. In a world where health care costs were smaller, wages would become a larger part of employee compensation, meaning bigger paychecks for workers.
Of course, all this depends on finding a long-term solution to the health care cost problem. The fact that we’ve now gone three or four years without any significant growth is a positive sign, but it’s far from definitive. Recent projections from the Center for Medicare and Medicaid Services suggest that cost growth may be coming back. But the big test still lies ahead of us. When the economy really picks up, will health care spending pick up with it?