The U.S. spends nearly 18 percent of its GDP on health care—more than any other developed country. Rising health care costs strain government budgets and are passed on to American families through higher premiums and out-of-pocket spending. But America’s spending on health care has slowed unexpectedly in recent years. Since 2006, real per capital spending growth has averaged 1.9 percent per year, compared with an average of 4.9 percent per year between 1960 and 2006. If this trend is sustained, total savings will be substantial; recent estimates suggest that if current lower growth rates continue, total U.S. spending will be $770 billion lower between 2011 and 2021 compared with the Centers for Medicare and Medicaid’s previous forecasts. So the question is: Will it last?
In Congress, the debate has centered on the Affordable Care Act. Some have pitched it as the solution to cost containment (with Bill Clinton implying it is responsible for the recent decline in health cost growth), others see its potential for huge spending growth. But the ACA is neither the fiscal nightmare that the current debate in Congress would suggest, nor has it yet proven to be the panacea for cost containment. It is not the primary driver of the recent spending growth slowdown which started in 2006, two years before Barack Obama was elected president. In the short and medium term, the ACA will increase spending through expanded access to Medicaid and private insurance, but insurance expansion is expected to only increase average annual growth rates of health spending by 0.1 percent per year, a small effect relative to overall trends in spending growth. The ACA will also decrease Medicare spending by reducing reimbursement rates, but the full effect of changes in reimbursement formulas is still uncertain.
In the long run, it is the development and adoption of new medical technologies and practices which drive trends in health costs. Other factors, such as the aging population and increased obesity, play a role, but their importance is secondary. The U.S. has led the world in spending growth because it has been quick to adopt more expensive technologies and practices—in many cases, even if there is no evidence that they lead to improved outcomes. For example, the U.S. is the world leader in the use of expensive robotic surgery techniques, even though there is no evidence that robotic surgery has major benefits compared to conventional surgery. In the U.S., a significant fraction of Medicare spending also goes to intensive hospital care for the elderly, despite studies finding that the benefits are minor.
So, future estimates of health spending will rely on the rate of future technology growth. In a recent paper presented at the Brookings Institution, my co-authors and I argue that while the pace of technology growth has slowed somewhat, costs will still continue to grow into the foreseeable future as health care providers adopt new technologies. Our best projection over the next few decades is that growth in real annual per capita health spending will be about 1.2 percent higher than real per capita GDP. This is lower than historical growth rates, but still implies that the costs of American health care will continue to rise to 25 percent of GDP in the next 20 years. This increase in spending implies substantial economic pains in the form of higher private premiums, higher taxes, and/or lower spending on other government programs.
If this spending growth were due to the adoption of high-value technologies, then this economic pain may be worth it, because higher private premiums would be offset with increased life expectancy and a better quality of life. But evidence suggests that health care providers continue to adopt expensive technologies that are not cost-effective relative to existing alternatives—or in some extreme cases, relative to no treatment at all. For example, the cost of proton beam therapy to treat prostate cancer is nearly double that of alternative treatments (such as radiation therapy), but has not yet been shown to be more effective. Nevertheless, the number of proton beam facilities in the U.S. is set to double between 2010 and 2014. The use of robotic surgery also continues to grow rapidly, with the leading provider of the technology reporting a 26 percent increase in number of procedures performed last year.
Further cost control will require changing the way the U.S. rewards innovators in the medical sector. In other sectors, from airlines to computing, technology growth is often associated with reduced costs as companies compete to lower prices. New methods of reimbursing hospitals for services which reward quality over quantity, such as bundled payments in Medicare or the use of Accountable Care Organizations (both of which are implemented as a part of the ACA) may reduce costs. But the success of these programs will be limited as long as the prevailing norm is that care should always be provided as long as a patient has the potential to benefit, regardless of cost. As long as the U.S. continues to adopt and utilize those high-cost technologies that provide little to no marginal benefit to patients such as proton beam therapy, robotic surgery, and intensive end-of-life care for elderly patients, growth in the cost of health care will continue to define the next generation.
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