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Analysts See No Immediate End to Slower Spending but Differ over New Controls

By John Reichard, CQ HealthBeat Editor

July 31, 2013 -- The surprising slowdown in health care spending that recently led to lowered deficit spending projections shows no strong signs of reversing, judging from comments by budget analysts and economists at a Washington, D.C., forum.

But while no one was forecasting an imminent end to the trend, speakers at the forum differed over the need for new controls to help keep it going.

The slower pace of per capita health spending growth has been apparent for many months, in large part the outgrowth of weakened demand for health care stemming from the nation's economic woes. But more recently, abundant evidence has surfaced that says not only has utilization been less, but price growth has also slowed to an historic degree. Health care price growth is lower than it has been in at least two decades, said the Altarum Institute, the Ann Arbor, Michigan-based nonprofit that sponsored the event.

"The 12-month moving average at 1.8 percent in April 2013 is the lowest since the 1.7 percent recorded in September 1998," the institute said in a July 12 report. The institute conducts research and provides consulting services to providers.

For May, hospital prices grew by 1.8 percent, nursing home prices rose by 0.5 percent and prices remained flat for physicians. Meanwhile, other prices fell: Home health prices were down by 0.2 percent, prescription drugs by 0.1 percent, and durable medical equipment by 0.5 percent.

Last week, the White House released statistics saying that consumer prices for health care goods and services increased just 1.1 percent in the 12 months ending in May, what it called the slowest annual rate of increase in 50 years.

The panelists at the forum included David Walker, a former U.S. comptroller; Maya MacGuineas, president of the Committee for a Responsible Budget; economists David Cutler of Harvard University and Uwe Reinhardt of Princeton University; and Urban Institute analysts John Holohan and Stephen Zuckerman.

MacGuineas said that while there have been some improvements in the budget picture, she's pretty sure the spending slowdown won't last and that debt will continue to be on an unsustainable path because of outlays for Medicare, Medicaid, and the health care law (PL 111-148, PL 111-152).

"We're nowhere near close to having done enough," she said. Even deficit reduction proposals like the Bowles-Simpson plan wouldn't get the job done, she said. "We haven't seen enough structural changes [in health care] to think this will last."

Structural Change Pushed

She urged using the pause in spending growth to adopt one or two structural changes and to do research to see what effect they are having. As examples, she cited changing Medicare into a two-track system preserving traditional Medicare while at the same time testing a premium support approach. And she suggested cost-sharing incentives for beneficiaries. "The whole structure of having very little skin in the game I think is very dangerous."

Walker joined MacGuineas in urging that a national budget be set for health care expenditures. "We are the only major industrialized nation dumb enough not to have a budget for health care," he said.

Walker is now CEO of a group called the Comeback America Initiative.

Walker said he supports universal coverage but criticized the health care law. "I think it's good news and bad news. The good news is, we're going to have, hopefully, about 30 million-plus people get health care coverage who don't have it."

"But what's the real cost going to be?" Walker asked. He said that "it's a typical example of what government does. If our health care system was a house before the Affordable Care Act, it was structurally unsound, mortgaged for more than it's worth, and headed for foreclosure. So what did the government do? Rather than ensuring structural integrity, making sure that we can make the mortgage payments and avoiding foreclosure, we added a new wing onto the house.

"And the new wing was supposed to be paid for—supposed to be—through spending reductions and additional tax increases. But we didn't deal with the structural integrity of the overall system." And now municipalities such as Chicago and Detroit are looking to shed their outstanding health care liabilities by sending retired employees to insurance exchanges, he said.

Walker said universal coverage should be reworked so that the government ensures proper preventive care and protects citizens against catastrophic health expenses but otherwise lessens subsidies for those who can afford to pay more.

But Zuckerman of the Urban Institute cast government insurance programs in a different light while attributing the slowdown in private sector spending growth at least in part to employers covering fewer people.

He said Medicare is actually doing a better job than the private sector in slowing per-enrollee spending, and Medicaid is doing an even better job than Medicare. Regarding Walker's "new wing" analogy, Zuckerman noted that the Congressional Budget Office said the health care law was paid for and said the overhaul was not simply a coverage expansion measure.

"Definitely the ACA did not forget costs," he said. It includes measures to control costs, such as inducing competition among insurers in the new exchanges, the coming tax on high-cost insurance plans, and innovations such as medical homes and accountable care organizations, Zuckerman said.

He said there are many such innovations occurring in the private sector, even though it has covered fewer people prior to the health care law. "All of this activity really could really be changing things over time," he said. Pricing in the United States is also part of the problem, he said. Relative to Europe, "we're paying a lot more per unit of service."

Health Law Curbing Costs

Government policy to control spending also got a big pat on the back from Chapin White, a former Congressional Budget Office (CBO) analyst who now is an analyst with the Center for Studying Health System Change.

"The ACA is slamming on the brakes," he said.

White singled out the yearly reduction the law makes to Medicare payment increases to providers to account for improved efficiency in the overall economy. "The productivity adjustment doesn't get a lot of attention" but will have a profound effect of Medicare spending over time, he said.

"Between now and 2024 CBO is projecting that Medicare's spending growth per beneficiary is actually going to be lower than growth in GDP per capita," he said. "That's something that kind of makes budget analysts' minds explode. Negative excess growth in Medicare. That's not something we're used to hearing about or thinking about."

White also questioned predictions that health spending will take off with up to 30 million more people getting coverage under the health law. The overhaul "is shifting a lot of people into Medicaid. It's shifting a lot of people into exchange plans. Both of those types of health insurance are going to be paying providers in a much more stingy way than your typical private insurance today."

White added that under the health law the "Cadillac" tax starting in 2018 "is basically putting a hard ceiling on the premiums for employer sponsored insurance." The tax requires employers to pay taxes on premiums above a certain level. He also predicted that "spillover effects" leading private insurers to follow Medicare's lead in provider payment cuts "are going to constrain prices as well."

Cutler and Holohan expressed a degree of confidence that the spending slowdown will last – in part because people are broke. Cutler noted the rise of high deductible plans. "That deductible is more than most people have in the bank," he said. "Many people are effectively acting as if they are uninsured." Holohan attributed part of the slowdown to rising numbers of Americans that earn below 200 percent of the federal poverty level, he said.

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