Health Care Spending Health Care Spending GrowthGrowth

Michael Chernew

April 18, 2012

Definitional issues matterDefinitional issues matter

Focus on spending at the population (national) Focus on spending at the population (national) level (i.e., Price x Quantity), notlevel (i.e., Price x Quantity), not

– Spending per unit of service [i.e. Price]Spending per unit of service [i.e. Price]– Cost of producing a unit of serviceCost of producing a unit of service– Spending for a disease cohortSpending for a disease cohort

Distinguish between total spending or government Distinguish between total spending or government spending spending

– Total spending is the most comprehensiveTotal spending is the most comprehensive– Government spending causes most alarmGovernment spending causes most alarm

TaxesTaxes

DataData

Health Care Spending is not SustainableHealth Care Spending is not Sustainable

0

2

4

6

8

10

12

14

16

18

20

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

% o

f GD

P

National Health Expenditure as % of GDP

Excess Spending Growth  1940-

19501950-1960

1960-1970

1970-1980

1980-1990

1990-2000

2000-2009

Average annual growth in per capita health expenditures

4.0% 3.6% 5.6% 4.2% 4.9% 3.0% 3.2%

Average annual growth in per capita GDP

3.1% 1.5% 2.7% 2.0% 2.0% 2.1% 0.5%

Excess growth in health expenditures

0.9 2.1 2.9 2.2 1.4 0.9 2.7

Share of per capita Income Growth Devoted to Health Care

5.3% 5.5% 12.9% 16.5% 25.5% 18.7% 91.5%

2005 Dollars (adjusted using GDP deflator)Source: Spending and population data obtained from Centers for Medicare & Medicaid Services National Health Expenditures Data, 2011 and Newhouse (1992).

Consequences of Higher TaxesConsequences of Higher Taxes

If finance higher health care spending by If finance higher health care spending by taxes:taxes:– Marginal tax rates of high income earners Marginal tax rates of high income earners

could rise to 70% by 2060could rise to 70% by 2060– GDP declines(relative to trend) by 11%. GDP declines(relative to trend) by 11%.

Magnitudes depend on the exact Magnitudes depend on the exact assumptions about tax policyassumptions about tax policy

Source: Baicker and Skinner: 2011: Assumes health care spending growth consistent with 2010 CBO long run forecast

Private Health Care Spending is not Private Health Care Spending is not SustainableSustainable

Concepts and EvidenceConcepts and Evidence

Slowing spending growth Slowing spending growth

Time

SpendingSpending High spending, rapid growth

Low spending, rapid growth

Low spending, slow growth

Level vs. GrowthLevel vs. Growth

Change in Medicare SpendingChange in Medicare Spendingvs. Percentage PCPsvs. Percentage PCPs

Drivers of Spending GrowthDrivers of Spending Growth

Could obesity be driving spendingCould obesity be driving spending

Probably contributes to spending growthProbably contributes to spending growth

The effects interact with technologyThe effects interact with technology

Costs were growing faster than real GDP Costs were growing faster than real GDP for EVERY 10 year period since WWIIfor EVERY 10 year period since WWII– Even before obesity epidemicEven before obesity epidemic

If the only change between 1987 and 2001 If the only change between 1987 and 2001 were BMI, then real, per capita spending were BMI, then real, per capita spending would have risen ~ 1%/ yearwould have risen ~ 1%/ year

Long run drivers of spending Long run drivers of spending growthgrowth

Medical technologyMedical technology– New knowledge (and associated stuff)New knowledge (and associated stuff)

Less important factorsLess important factors– PricesPrices– AgingAging– Rising incomesRising incomes– More generous coverage (static effects)More generous coverage (static effects)– InefficiencyInefficiency– Inappropriate useInappropriate use– LiabilityLiability

Types of technology changesTypes of technology changes

1951 - 1971 : little ticket items1951 - 1971 : little ticket items– lab testslab tests– X-RaysX-Rays

1971 - 1981 : big ticket items1971 - 1981 : big ticket items– CABGCABG– C-sectionC-section

– radiation & chemotherapy for breast cancerradiation & chemotherapy for breast cancerEarly and Mid 1990sEarly and Mid 1990s– PharmaceuticalsPharmaceuticals

2000’s2000’s– Imaging,Imaging,– BiologicsBiologics

Myth: In Other Industries Myth: In Other Industries Technology Lowers SpendingTechnology Lowers Spending

Do not confuse price (cost per unit) with overall spending– Computers

Prices fall: Spending rises

Demand is crucial to determine effects of technology on spending

Benefits May Justify CostBenefits May Justify Cost

Slowing spending growth requires us to slow Slowing spending growth requires us to slow growth in price or quantitygrowth in price or quantity

Determining when to apply medical technologies Determining when to apply medical technologies is crucialis crucial

Average value of technology (widely viewed as Average value of technology (widely viewed as great) may differ from marginal value (may be great) may differ from marginal value (may be small)small)– Knowing when to apply technology is crucialKnowing when to apply technology is crucial

Our goal must be to promote ‘value’Our goal must be to promote ‘value’

Technology Reflects the SystemTechnology Reflects the System

InsuranceInsurance

Cost ContainmentCost Containment

Can we change the system to preserve Can we change the system to preserve innovation but manage new knowledge innovation but manage new knowledge more efficiently?more efficiently?

ImplicationsImplications

Reductions in the level of spending are important, Reductions in the level of spending are important, maybe VERY important, but…maybe VERY important, but…

Determinants of spending growth often differ from Determinants of spending growth often differ from determinants of level of spendingdeterminants of level of spending

Strategies to control spending growth must be either:Strategies to control spending growth must be either:– Continual one time savingsContinual one time savings– Fundamental environmental changeFundamental environmental change

Public spending growth can be controlled by Public spending growth can be controlled by shifting spending to patientsshifting spending to patients