Various economists and health care policy experts have tried to explain the recent slowdown in health spending growth. Some say it’s because of the Affordable Care Act, whose major provisions have yet to take effect. Others say it’s because of the economic slowdown, suggesting that the decrease in spending growth is demand driven and only temporary. Now, a new analysis from the Congressional Budget Office working papers series finds no evidence that the economy contributed to slower health spending growth, at least for fee-for-service Medicare Part A and Part B.

Great Recession Might Explain Slower Growth in Health Spending:

Growth in health cost and spending has slowed in recent years. Traditional fee-for-service (FFS) Medicare spending grew at an average annual rate of 8 percent from 1980 to 2005. Yet between 2007 and 2012, that rate dropped to 3 percent. This year the Congressional Budget Office (CBO) reduced its 10-year spending projections for Medicare by 2 percent, from $6.53 billion over 10 years to $6.38 billion.

Medicare was not the only place where health costs fell. The CBO also recently reduced its budget projection for Medicaid by 5.6 percent. The Kaiser Family Foundation reported relatively slow growth for employer-sponsored insurance (ESI) average premiums in 2012 – 4 percent for family health coverage. USA Today reported health spending as a share of the economy shrank to 17.04 percent last year, compared to 17.12 percent in the year before. To round out the good news, the Centers for Medicare and Medicaid Services (CMS) Office of the Actuary (OACT) found that national health expenditures grew 3.9 percent each year from 2009 to 2011, the lowest level of growth in 50 years.

What happened? Supporters of the Affordable Care Act (ACA) say the decrease is because of the controversial law, although most health reform provisions are yet to take effect. A recent analysis from the Kaiser Family Foundation concluded that 77 percent of the drop in health care spending was because of a broad economic downturn during the Great Recession.

For details, see my previous post, Health Care Costs: Slowdown Because of Economy, Not Obamacare.

No Evidence Economy Played a Role in Medicare Spending Slowdown:

But here is another twist: A bad economy apparently does not explain any of the slowdown in FFS Medicare spending growth for Part A and Part B, says a new report from the CBO working paper series.

Authors Michael Levine of the CBO and Melinda Buntin of Vanderbilt University focused on the decrease in FFS Medicare spending growth for elderly beneficiaries, from 7.1 percent in 2000-2005 to 3.8 percent in 2007-2010, not accounting for inflation. The authors focused on elderly beneficiaries because there are fewer unobserved differences within that group that might affect the analysis. Spending growth trends were similar for non-elderly beneficiaries.

Here is a summary of the findings:

  • Changes in Medicare payment rates and beneficiaries’ demand for medical services could explain only 0.8 percentage points of the 3.2 percentage point slowdown in growth during 2007-2010.
  • That leaves 2.4 percentage points of reduced growth unexplained.
  • Growth in hospital inpatient spending, which accounted for the largest share of the program’s spending, fell from an average annual rate of 4.3 percent between 2000 and 2005 to 1.7 percent between 2007 and 2010.
  • Spending growth slowed for a broad range of elderly Medicare beneficiaries: both high- and low-cost beneficiaries, urban and rural residents, and across states.
  • 0.3 percentage points of the explained spending growth reduction was estimated to come from changes in demand because of age distribution, obesity status, and smoking history.
  • 0.2 percentage points of the reduction came from the fact that more beneficiaries enrolled only in Part A and not Part B.
  • 0.1 percentage points of the reduction was attributable to an increase in the use of prescription drugs, basically meaning there was a link between more prescription drug use and less spending on physicians and hospitals.
  • None of the spending growth reduction could be explained by the economic downturn, despite the fact that the elderly faced declines in home values, losses in financial assets, and slower income growth.

Read the full CBO working paper here for details.

Theories on Causes Behind Lower Spending Growth:

So if not the economy, if not Obamacare, if not payment rates and demand for services – what does explain the slowdown in health spending growth? The CBO paper authors have two ideas they say are worth researching, at least to explain traditional Medicare spending growth declines.

1. Changes in care delivery

The authors suspect that providers in recent years have shifted care delivery methods toward lower-cost alternatives. Slower adoption of health technologies and care management also might explain lower growth in costs.

2. Changes in provider incentives

Reimbursement for providers from private health plans might have grown faster than Medicare payment rates, giving providers an incentive to treat Medicare beneficiaries less than privately insured patients. Of course, when unemployment rises and the number of privately insured people falls, providers would have an incentive to treat more Medicare patients to make up the business. The CBO paper tested those theories and found inconclusive results. Care management and general public awareness about health costs also could have influenced the decline in Medicare spending growth.

Though the CBO paper makes no conclusions about those theories, supporters of the ACA and health reform efforts across the country will find comfort in their ideas. New, realigned financial incentives are central to the care management and payment reform initiatives launched by state Medicaid programs, private health payors, and Medicare. If those things do in fact reduce health care spending growth, we can expect more good news to come.

Medicare is unique, the data are not all in, and the debate is far from settled but the CBO paper makes for an excellent read.