The Future of U.S. Health Care Spending: Understanding the Slowdown

Debate related to health care spending tends to focus on high growth rates relative to GDP; however, the recent slowdown in health care spending has led many to wonder if these historic trends are changing.

Recently, the Engelberg Center for Health Care Reform at the Brookings Institution brought together experts from economics and health policy to discuss the future of health care spending. The first session examined important background information about health care spending that provided a basis for subsequent discussions on current and future trends.

The Panel

Dr. Louise M. Sheiner is a senior economist on the Board of Governors of the Federal Reserve System. Her fields of interest include fiscal policy, public economics, health, education and welfare. Her publications are numerous and include the paper presented and discussed during this session called “Perspectives on Health Care Spending Growth.”

Dr. Charles Roehrig is vice president and director of Altarum’s Center for Sustainable Health Spending. The Altarum Institute  is a nonprofit research and consulting organization specializing in health systems. Dr. Roehrig’s research is related to the timely tracking of health spending, as well as determining future and sustainable models of health spending growth. His research has been published in respected peer-reviewed journals.

Dr. Amitabh Chandra is professor of public policy and director of health policy research at the Harvard Kennedy School of Government. Dr. Chandra is an economist whose research focuses on multiple aspects of health care including productivity and cost-growth, medical malpractice and racial disparities. His research has been supported by organizations such as the NIH and Robert Wood Johnson Foundation and published in a variety of peer-reviewed journals.

The panel was moderated by Dr. Mark McClellan who is a senior fellow and director of the Health Care Innovation and Value Initiative at the Brookings Institution. Dr. McClellan is a doctor and economist whose work centers on promoting quality and value in patient-centered health care. Watch The Future of U.S. Health Care Spending - Part 1 here.

Key Insights

As the first panel of the day, the participants set the stage for the remaining conversations by exploring past trends in health care spending.

Out-of-Pocket Spending

  • The percentage of out-of-pocket spending relative to total health spending has decreased since 1960. According to Dr. Sheiner, this should not be surprising because “insurance is supposed to insure … so if we hadn’t seen declines in out-of-pocket spending over time then as health spending became a bigger and bigger share of income, being sick would be a harder and harder thing for people to deal with. … So to counteract that, insurance contracts have changed, and we’ve had lower out-of-pocket spending.”
  • What is surprising is the contrast between the decline of out-of-pocket spending relative to income even while overall health spending has tripled as a share of GDP. Dr. Sheiner suggested this contrast points to significant changes in the “structure of coverage to be able to have offset all of the increase in health spending as a share of GDP when it comes to out-of-pocket-spending.”

Public Financing

  • Expansions of public funding such as Medicare and Medicaid influence decreases in out-of-pocket spending in terms of the number of people and the number of services covered. In 2012, government health spending accounted for nearly 45 percent of total health spending.
  • Dr. Sheiner noted that decreases in out-of-pocket spending and increases in public financing “are reflections of societal demands.” As health technology such as screening techniques or treatment regimes evolved and improved, the public wanted affordable access to these advances. Thus, Dr. Sheiner said, “We figured out how to change our structures so that … most people could get [access to health technology],” including those with publicly funded coverage.

Relative Price

  • Medical price increases (relative to inflation) are also important drivers of health spending with medical labor costs playing a particularly significant role.
  • Wages for nurses have increased significantly compared to wage increase in general — a growth that is matched by higher levels of education among nurses. As health systems have moved toward a more sophisticated technological era, those working within the system had to become more educated as well.

Finally, the panelists demonstrated how previous GDP actually predicts current health care spending. Over time, we see a lag of approximately four years between economic downturns and health spending. The major effects of a recession are slow to affect health spending because they are mediated through employers or the government. It takes time for these entities to negotiate less expensive contracts with health insurers and additional time to implement reductions in coverage before changes actually influence employee health spending.

The panelists were reluctant to make definitive predictions in terms of the future growth rates of health spending, but did note that innovations such as a shift away from fee-for-service models are necessary to help temper the rate of health care spending growth.

As health care spending continues to fluctuate, trained professionals such as those from MHA@GW will play a key role in helping systems and patients understand the impact of efficient spending on the future of public health. For more coverage of “The Future of U.S. Health Care Spending,” check out previous posts with recaps from other sessions including “Budgets and the Private Sector” and “What is Possible While Improving Health?”