Will the Slowdown in Health Care Costs Last?

Conventional wisdom in Washington surrounding health care spending has been doom and gloom -- the solvency of federally mandated programs like Medicare and Medicaid has even been brought into question. The pace of growth in costs seemed unsustainable, with projected payouts threatening to strain an already worrisome federal budget deficit.

But it appears there's a welcomed break in the trendline. Ever since the end of the Great Recession in 2009, the deficit has been shrinking and one reason is an unexpected slowdown in the pace of health care spending, which is the size of about 18 percent of the economy.

This is promising news for those who point to spending in the category as a major culprit for runaway budget deficits. Though experts debate the cause of the slowdown -- could it be improved efficiency within the medical industry, the after-effects of the economic downturn or simply that younger Medicare enrollees are healthier than prior generations? -- the trend has provided some overall relief to the federal budget.

Health care costs appear not to be budget-breaking as they once were believed to be, though the waves of aging baby boomers and the growing share of Americans covered under the Affordable Care Act will still drive federal health care spending in the long term.

There's little doubt the punishing economic clump damped demand for health care services in general, and the fact that it hasn't picked up could reflect the still-soft economic environment since the most recent downturn that lasted from December 2007 to June 2009, according to a recent report from the Brookings Institution.

But whatever the reason, it's been a sigh of relief for Washington's budget wonks and it's even got politicians in both parties thinking how they might need to recast the message that entitlement spending is the root of all evil.

"Changes in the long-run growth rate of health costs have huge implications for budget deficits and for whatever other kinds of adjustments we're going to need to make," says Louise Sheiner, author of the report and a senior fellow of economic studies and policy director of the Hutchins Center on Fiscal and Monetary Policy at Brookings.

The slowed pace of spending within health care is "definitely a good thing because we don't think we've had worse health care or anything. The slowdown will lower the [overall] level of health care spending, even if it doesn't continue," Sheiner says. "We don't think there will be a huge makeup in spending from the slowdown."

The cooled spending pace of Medicare in particular, which is the biggest expenditure type within health care, is helping to drive the deceleration. The Congressional Budget Office has been lowering its projections for Medicare spending every year since the Affordable Care Act passed in 2010, even as it factors in a number of scheduled reductions in spending. Medicare costs account for about 14 percent of the total federal budget, so its tempered cost growth is welcomed as a relief for the deficit overall.

Medicare spending per person is projected to be about $1,200 less than it was expected to be right after the Affordable Care Act was passed in 2010, and it'll be $2,400 lower in 2019, according to an analysis of the CBO's most recent budget outlook by the Kaiser Family Foundation, a non-profit, non-partisan organization that focuses on health care policy.

The trend bucks a previous assumption that Medicare spending was growing much faster than the overall economy, a term researchers dubbed " excess cost growth." But no one knows exactly how to explain the phenomenon yet, nor is it certain when the rate of spending growth might pick up.

"The recent slowdown in Medicare spending is unprecedented and comes at somewhat of a surprise. It doesn't alleviate long-term pressure to finance care for an aging population, but it does remove some of the immediate pressure to cut costs," says Tricia Neuman, senior vice president at the Kaiser Family Foundation and director of the Program on Medicare Policy and the Project on Medicare's Future.

Talk to medical industry professionals, however, and the explanation centers on steps they have taken to make their industry more efficient. Hospital stays for common surgical procedures like gallbladder removal or knee replacements have been shortened through advances in anesthesia and awareness that getting patients out of the confines of the hospital is good business.

Recent legislation, including the Affordable Care Act, has focused on making hospitals more cost-conscious through changes in reimbursements. For example, hospital re-admissions -- when a patient is readmitted to a hospital shortly after being discharged -- for Medicare beneficiaries fell by 130,000 between January 2012 and August 2013, according to the Center for Medicare and Medicaid Services. CMS reduces payments to hospitals with excess readmissions, which can be indicative of low-quality care or poor follow-up care, so this could mean care providers are ramping up preventive efforts to keep patients healthy.

But the unanswerable question is what will happen as waves of aging baby boomers enter their senior years -- roughly 10,000 of them will turn 65 every day for the next 15 years. Will they become heavy consumers of medical services as were previous generations of elders? Or are they healthier than their parents?

The aging of baby boomers and longer life expectancies have placed increasing focus on the solvency of Medicare -- the federal health insurance program for Americans 65 years and older and certain younger people with permanent disabilities. The federal program pays for hospital and doctor visits, prescription medications and other services.

CBO estimates that Medicare outlays will increase by $12 billion, a growth of about 2 percent, in 2014, similar to the rate of growth in 2013, according to the agency's August update to the budget and economic outlook through 2024.

The total downward revision to Medicare spending since 2010 has been $90 billion, or a 12 percent reduction, according to the CBO. The combined sum of that amount with the downward revision to Medicaid spending is $160 billion, or 12 percent, lower now than it was projected to be in 2010.

But the slowing hasn't just been since the ACA was passed. A recent CBO working paper looked at the slowed pace of growth of fee-for-services -- which comprise the biggest part of Medicare spending -- that persisted even in the years running up to 2010. Released last year, the study shows that the most recent financial crisis does not fully explain the slowed rate of Medicare spending.

Even though the CBO's revised projections may quell the fears of some budget watchers, there's always the possibility that the improvement could lead to complacency on part of providers in making sure they remain efficient, according to Melinda Buntin, professor and chair of the Department of Health Policy at the Vanderbilt University School of Medicine.

"We should not forget that we do have budget challenges due to the very high costs we have and due to the aging of the population," Buntin says. "I don't think we can count on this low rate of growth persisting if we don't have continued attention to issues of efficiency in health care delivery."

Faster enrollment growth, an increase in service use that correlates with more severe illnesses and price acceleration could all contribute to an acceleration in Medicare spending down the line, according to a post Neuman co-authored on the Kaiser website.

"One of my concerns is that some of the initiatives that are going forward right now -- which are maybe causing players in the health care to look at their levels of efficiency, waste in their system, ways to improve very carefully right now and who have been for a few years -- I would hate for the pressure to let up on heading in the direction we need to go in rewarding efficient providers and rewarding better value systems," Buntin says.

According to the CBO's estimates, Medicare spending will stabilize as a percentage of future gross domestic product, which measures the value of all goods and services produced in the U.S. Although the growth rate of health care costs has had less of a dent on the federal budget than previously thought, overall spending in the category will grow with time. Within the next 25 years, federal spending on health care could nearly double, according to projections from the Peterson Foundation

Specifically, spending on major programs like Medicare, Medicaid, the Children's Health Insurance Program and subsidies through health insurance exchanges will account for a growing portion of total GDP. The total costs of those programs over the past 40 years constituted less than 3 percent of GDP, while they were about 4.5 percent of GDP in 2013 and will be a projected 6 percent of GDP in 2024, according to the CBO.

By 2039, health care costs could make up about 8 percent of GDP. But the good news? That's 1.6 percentage points, or about 15 percent, less than the 9.6 percent the CBO projected in 2010. Brookings' Sheiner points out in a recent blog post that Medicare cost projections for 2035 in particular are 35 percent lower from what they were just five years ago, despite the coverage expansions under the health care reform bill.

"We knew we were going to have to get spending down somehow," Sheiner says. "It'd be great if it were just from efficiency, but it almost doesn't matter from a budget perspective, we just needed the numbers to come down. We have a lot of things in place now that hopefully will be focusing on quality and efficiency. People are optimistic that those will matter over time."

So for now, there's some happy talk about the cool down in the growth of health care costs, throughout the industry and among Washington's policymakers. But whether the condition is temporary or permanent won't be known for some time.
More on Medicare Spending:

-- U.S. News' Guide to Medicare Insurance

-- What's Behind the Slowdown in Health Care Costs

-- How the Slowdown in Medicare Spending Is Affecting Hospitals

-- Republicans Hurt By Slowing Costs in Health Care

-- Study: Employers Pushing More Health Costs on Workers Despite Slow Premium Growth

-- Opinion: No Mission Accomplished on Health Care Costs

-- Opinion: Health Care Spending Reform Won't Improve Actual Health

Katherine Peralta is an economy reporter for U.S. News & World Report. You can follow her on Twitter or reach her at kperalta@usnews.com.