Updated budget projections from the Congressional Budget Office released yesterday show that the deficit this year is on track to be the smallest since 2008, the start of the recent recession, and that debt as a share of total economic output is stable over the decade-long budget window and actually declining over the next several years.
Fast falling deficits aren’t themselves good news – macroeconomists estimate that federal belt-tightening over the last two years has shaved two percentage points from economic growth and added one percentage point to the unemployment rate, a fiscal policy ‘own goal’ with growth and employment remain depressed from the recession. But part of the drop in deficits comes from a very encouraging trend: evidence is mounting that the recent steep decline in healthcare spending could (with help from the right policies) become permanent.
From 2003 to 2012, health care spending grew at an annual rate of just 1.9 percent (after adjusting for inflation and population growth). Over the last three years, the growth rate was just 1.2 percent, the slowest since 1970 except during the latest recession.
As the CBO becomes increasingly confident that slowing health care spending won’t rebound as the economy recovers, it is lowering its projections for the future cost of government health care programs. Since March 2010, CBO-projected spending on Medicare and Medicaid has quietly fallen by about $225 billion for the next decade, or roughly 15 percent for each program. That’s a significant reduction in – it’s more than double the savings that would come from raising the Medicare eligibility age from 65 to 67 – but comes entirely from ‘technical’ changes, not policy changes.
New Economic Research Identifies Permanent Factors Slowing Health Spending
Two new studies support the existence of permanent factors that are slowing health care spending.
A Health Affairs article published Monday by Harvard professor David Cutler found that the recession explained 37 percent of the health care spending slowdown from 2003 to 2012, and 8 percent came from a decline in private insurance coverage and cuts to some Medicare payment rates, leaving open the possibility that the majority (55 percent) of the slowdown was the result of fundamental changes.
A recent Kaiser Family Foundation study is more measured, and estimates that 77 percent of the recent decline in health spending comes from economic factors, but says “structural changes in the health system may be playing a modest role as well”.
Evidence of Structural Decline in Health Spending Highlights Potential of Obamacare
Professor Cutler’s research identifies three factors unrelated to one-time events like the recession that could be contributing to slower cost growth: less rapid technological change, increased cost sharing, and greater provider efficiency. While these factors are difficult to forecast – technological innovation is, almost by definition, unpredictable – they do show that runaway health spending is not a foregone conclusion, and that steps (built on existing trends) can be taken to rein in costs.
Any of the structural changes to health spending already at play pre-date Obamacare. Much of the law’s broad array of cost-reduction initiatives – including smaller increases in payments to Medicare providers, taxes on high cost “Cadillac” health plans, and accountable care organizations – have not yet taken effect.
But the sizable difference structural changes are already making to health care costs suggests that health reform does have the potential to materially lower future costs. If non-temporary factors are already materially ‘bending the cost curve’, upcoming reforms may be able to do the same. One conclusion Cutler draws from his research is that “the future of the Affordable Care Act may be as important to health care spending as economic growth is”.
Slowing Health Spending Has Rewards: Up To $430 Less In Health Expenses Per Covered Worker For Employers
The slowing of health spending is so important because it has economic rewards more immediate than reducing long-term demographics-driven budget pressures.
Professor Cutler’s research reports that if spending growth stays at levels seen in the last three years, public health care spending would be $770 billion less over the next decade than currently projected by government actuaries.
This windfall would have serious implications for businesses, who would spend $92-$430 less on health expenses per covered worker, and households, who would spend $62-$290 less on out-of-pocket health expenses.
Aggregated across the economy, lower health care spending would have significant macroeconomic benefits. White House economists calculated in 2009 that reducing the annual growth rate of health care costs by 1.5 percentage points a year would boost economic output by more than 2 percent in 2020 and almost 8 percent by 2030. Shifting resources from health care to more productive sectors of the economy has a significant economic impact.
If the cost-saving measures in health reform can essentially replace the role of the recent recession in slowing health care spending, the federal balance sheet and overall economy will see significant benefits.
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