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Despite Lower Health Spending, More Work Needed, Say Experts

By Rebecca Adams, CQ HealthBeat Associate Editor

April 11, 2014 -- The dramatic slowdown in health care spending over the past four years is significant. But it won't last forever and shouldn't be an excuse for failing to make fundamental changes that could counter health inflation in the coming decades, said several experts at a recent forum.

The event, held at the Brookings Institution Engelberg Center for Health Care Reform, focused on the significant effects that health care spending has on the federal budget and the well-being of the public.

Health spending's share of the gross domestic product has grown from 5 percent of economic output in 1960 to more than 17 percent today.

Former Centers for Medicare and Medicaid Services Administrator Mark McClellan said the choice of Office of Management and Budget (OMB) Director Sylvia Matthews Burwell as the next nominee to head the Department of Health and Human Services (HHS) could reflect that the agency will be expected to not only expand coverage but hold down costs.

"For decades, health care spending growth seemed like a given, with important fiscal and economic consequences," McClellan said. "These health care programs have major budgetary as well as fiscal and health implications."

Experts couldn't agree on how long the slowdown in health spending will continue. The cause has been alternately attributed to the recession, the steady uptick in out-of-pocket costs for consumers and a greater use of lower-cost treatments such as generic drugs. Another factor could be a decline in new breakthrough drugs or medical technology. Some credit more preventive care and payment systems that rewards providers based on quality rather than volume.

Additionally, one new tax in the health care law (PL 111-148, PL 111-152) "has the potential to have a very large effect," according to Engelberg Center senior fellow Paul Ginsburg. The so-called Cadillac tax will impose a 40 percent on high-cost health plans in 2018, but some employers already appear to be redesigning coverage to avoid it.

One obstacle to lower future health care costs is the political clout of pharmaceutical companies, medical providers and health industry officials who stand to lose from lower spending, said former OMB Director Alice Rivlin. Although she said some politicians and health industry officials realize that there is substantial waste in the system and "we have to get rid of it," one person's definition of wasteful spending is another person's income.

"Even dumbo things like competitive bidding for wheelchairs—who's against that? Well, manufacturers of wheelchairs," Rivlin said. "They're pretty powerful, so it isn't a slam dunk."

Even if spending is permanently brought in line with inflation, the nation still faces a sizable long-term fiscal gap, according to William Gale, the co-director of the Urban–Brookings Tax Policy Center.

Gale and his colleagues forecast four scenarios for future health spending through the next 75 years. If health care spending grows at the same rate as economic growth, then the fiscal gap is about 2.6 percent of the gross domestic product over that period.

If health care has an excess cost growth of about 2.5 percent, then the "fiscal gap explodes—exceeding 30 percent of GDP," wrote Gale and his colleagues in their paper.

Over the next decade, which is the most important time period for lawmakers who rely on Congressional Budget Office estimates of legislation, Gale projected that total federal deficits would be about 4.1 percent if health care spending and economic growth are about the same.

If health care spending has an excess cost growth of about 2.5 percent, then deficits would total about 6.3 percent of gross domestic product by 2024.

In the past half-century, health care spending has ballooned. Health care accounted for 2.1 percent of federal spending in 1962. Last year, it accounted for 27.7 percent of all outlays.

The surge is due to a decline in the amount of money patients have to pay out of their pockets for health care costs, the growing share of medical care that is paid for by government programs, relative prices and income growth, said Louise M. Sheiner, a senior economist with the Federal Reserve Board of Governors, in her presentation.

McClellan and Rivlin tried to look ahead to whether some key efforts to hold down health spending will make a major difference in a nation where the population is aging.

The pair looked at the idea of changing federal payments for providers so that value is rewarded rather than volume.

They also examined insurance designs that shift costs to consumers, and the idea of making more information to patients so they can choose lower-cost interventions. They discussed high-deductible health insurance plans, which typically are paired with health savings accounts. And they examined insurance designs in which consumers get a set subsidy to put toward health insurance and must choose among health plans.

McClellan and Rivlin additionally wrote about efforts to encourage prevention and wellness. Those could stave off expensive care for years.
"In each case, we have found promising interventions with some record of success, but no compelling evidence that a particular set of reforms will be sufficient to counteract the upward pressures on health spending," wrote McClellan and Rivlin.

They concluded: "While the slowdown in health care spending growth has taken some pressure off public and private budgets, it would be a mistake to assume that slow growth in health care spending will continue or that spending reflects high-value care and therefore, health care delivery reform is no longer an urgent priority."

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