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The growth of US health care costs has slowed substantially, giving hope to Americans that they may save as much as $770 billion on Medicare spending over the next decade, Harvard economists say. But how long will this cost respite actually last?

By Louise Kelly on May 7, 2013

According to recently published studies, people with health insurance saw increases in their medical expenses reduce from a high of about 8.8 percent in 2003 to an average of about 3 percent per capita between 2009 and 2011. In the US, the healthcare industry still remains one of the most expensive globally but this dramatic reduction in costs could indicate potential structural changes that may save the country hundreds of billions of dollars.  

Published yesterday (Monday, May 6^th) in the journal Health Affairs,  the expert reports aim to shed light on why the annual growth of medical spending slowed and the analysis of this research will be part of the on-going discussions in the federal government over how to control spending growth for Medicare and Medicaid.

Cause and effect

Most health economists agree the recent slowdown is of fiscal benefit, but the arguments are diverse as to why the cost drop occurred and, indeed, how long the dip will last.

Forecasts by the government economists and Medicare actuaries have acknowledged the slowdown in health care spending but are still estimating under the assumption that costs have slowed largely due to the 2007 economic crisis.

The latest Harvard study suggests that just over a third of the decrease could be blamed on the crisis, meaning job losses and changes to benefits packages could also have contributed to this saving.

One of the co-authors, David Cutler, the Otto Eckstein Professor of Applied Economics, says that the analysis reveals the bulk of the decline could be attributed to a number of other factors, including a decline in the development of new drugs and technologies and increased efficiency in the health care system.

Show me the money

The authors of the study focussed on more than 10 million employees of large firms who kept their health coverage during the economic downturn, they delved deeper into these ostensive contributing factors. Although many employees' were found to suffer higher out-of-pocket costs as their employer-sponsored plans became less generous between 2007 and 2011, recession pulling the corporate purse strings tighter, the study concluded that this dip in employee cover only accounts for about 20 per cent of the reported decrease in health costs.

Regardless of the stance opponents or advocates of the 2010 Affordable Care Act take, or how long this dip lasts, the latest research from Cutler and his colleagues is encouraging.  Compared with the US government’s growth projections for health spending from 2004 to 2012 with actual increases in the period, the real growth rate was about half of the government’s prediction, indicating a gap of more than $500 billion in 2012 between the projections and spending.  

Says Cutler: “Historically, as far back as 1960, medical care has increased at about one-and-a-half to two percent faster than the economy. In the last decade, however, medical care has not really grown as a share of the GDP. If you forecast that forward, it translates into a lot of money.”