Health costs slowdown saves billions

The United States continues to experience a very marked slowdown in the growth of health-care costs, despite some widely misinterpreted new reports. And a growing body of evidence suggests the deceleration is driven by more than a temporarily weak economy – which is good news for the federal budget and for workers.

National health expenditures rose just 3.8 percent from August 2011 to August 2012, according to an Oct. 11 report from the Altarum Institute. And Medicare spending increased by only 3.2 percent in the fiscal year ending in September 2012, according to the Congressional Budget Office.

These are remarkably low growth rates. Consider that over the past four decades Medicare spending increased by more than 10 percent a year.

Nevertheless, last month many commentators falsely declared the end of the slowdown – largely exaggerating the findings of a report issued by the Health Care Cost Institute. That report showed expenses for those with employer-sponsored insurance rose 3.8 percent in 2010 and 4.6 percent in 2011.

This modest change was initially described as a “surge.” Yet by historical standards even 4.6 percent growth is very low – and one shouldn’t make too much of a 0.8 percentage-point change from one year to the next. What’s more, employer-sponsored insurance is only one component of total health spending.

The Altarum figures, which cover total national-health expenditures, also showed a modest acceleration in 2011 – but then the pace slowed again. “Our data indicate that the 2011 acceleration was not sustained,” the report notes. “Spending growth declined in the latter half of 2011 and dropped even further in the most recent months.”

So long live the slowdown!

There is good reason to think that lower growth will persist even after the economy turns around. For instance, costs have decelerated more for Medicare than for employer-sponsored insurance, suggesting that the shift isn’t entirely caused by the slow economy.

How much difference can slowing health-cost inflation make? Consider some recent calculations from two Harvard University economics professors, David Cutler and Jeffrey Liebman. They examined changes in the national health-care spending projections published by the Centers for Medicare and Medicaid Services.

In January 2009, the centers projected that expenditures would reach 19.8 percent of gross domestic product in 2017. This year, the projection for 2017 is down to 18.4 percent of GDP. That difference amounts to a whopping $280 billion. In other words, relative to the projections issued three years earlier, today’s forecasts suggest health savings of $3,500 per family of four by 2017.

Over the past few decades, middle-class workers have struggled as their incomes have stagnated in the face of globalization and technological change. If labor compensation hadn’t fallen so much as a share of national income, American workers would be enjoying about $750 billion more in take-home pay. Yet estimates suggest we are currently spending about that much each year on health-care costs that don’t improve health outcomes.

There isn’t much that policymakers can do to restore the $750 billion in lower labor compensation. But there is plenty they can do to get rid of waste in health care, which would fill in much of the gap in take-home pay. That is why we should be doing everything we can to perpetuate the slowdown in health-care costs.

Orszag is vice chairman of corporate and investment banking at Citigroup and a former director of the Office of Management and Budget in the Obama administration.