Is the Cost of Healthcare Really on the Decline?

With the expenses associated with health reform and ever increasing premium rates, it is hard to believe that recent studies are actually showing that healthcare costs are on the decline. For the third year in a row, the Centers for Medicare and Medicaid Services have docked the national health growth expenditures at a record low of 3.9 percent. Some, including actuaries, academics and other analysts have attributed the slowing of health expenditures to be repercussions of the lingering recession and the well-known association between unemployment and the decline in insurance coverage.

Health Affairs was just one of the journals to come out with health cost findings this week. In their study it was suggested that the fundamental structural changes to our health system has also contributed to the decline in health expenditures; specifically with the creation and heighten popularity of entities such as competition among health providers and health systems to achieve the highest standard of care, changes to the fee-for-service system, patient-centered medical homes and accountable care organizations (ACO), to name a few. As expected, the Obama Administration has claimed that this trend is due to the success of PPACA. Changes to Medicare policies and coverage changes were also noted as explanations for the spending slow down. Judging by this study, others like it and sheer economic history, we know that the state of the economy has direct impacts on the healthcare industry. Using these indicators we can expect that the country will return to historically high cost levels as the economy continues to recover.

Health Affairs also released a study this week that examines other reasons as to why spending growth has hit a record low. In areas of the country where job loss was not a factor, spending was higher but health expenditure rates still fell. David Cutler and Nikhil Sahini, two Harvard scholars, noted that the healthcare expenditure slow down actually began before the recession, meaning that there are other factors that may have been overlooked that have also caused healthcare expenditures to slow. The two argue that at least a small fraction of the slowdown is a result of the insurance coverage distribution. Other more significant reasons, which are still theory and have yet to be proven, are the sharp slowdown in prescription drug expenditures, new developments in imaging technology, population growth (largely below the Federal Poverty Line), aging baby boomers and migration in and out of the public and private systems.

With all of these factors playing some sort of role in the health expenditure slow down we are left with a key question–is this sustainable? Studies have shown that if the economy improves and health insurance coverage is expanded to the millions of people intended under PPACA then the reasons for the current healthcare slowdown will diminish. However, current predictions on the economic recovery are modest for the coming years and the economy is expected to slow significantly once again come 2018, which means that there is a chance that health expenditures will continue to decrease. If PPACA rolls out the way the Obama Administration hopes, with millions of Americans gaining insurance coverage through the competitive exchanges and many enrolling in Medicaid, the sheer competitiveness of the marketplace will naturally drive costs down. While we have not necessarily seen the evidence to back up this theory yet, we hope that it will all somehow fall into place!

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