Health Care Costs: All About the Economy?

The growth of spending on health care has slowed over the past few years.

But why has it slowed? That's a question with significant implications for many of the most pressing debates on Capitol Hill, especially regarding the future of Obamacare and the federal budget.

Researchers at the Kaiser Family Foundation and the Altarum Institute have released the results of a study that indicate that the slowdown in health care cost growth can be explained largely by the broader economic downturn. That rules out -- or at leaves little room for -- alternative explanations, such as the president's State of the Union Address suggestion that his health care law was behind the slower growth of health care spending. More importantly, if the Kaiser researchers are right, the government can't count on some sort of secular downward trend to lower government health care spending over the long term and create extra room in the budget for other kinds of spending.

Here's how the Kaiser researchers arrived at their conclusion. They developed a statistical model of health care spending based on macroeconomic factors, most importantly inflation and economic growth. They found that those two factors were strongly predictive of health care spending growth. This graph shows the path of health care spending growth and what the model would have predicted based solely on inflation and changes and real GDP:

From the report:

...our analysis suggests that much of the decline in health spending growth in recent years was fully expected given what was happening more broadly in the economy... Annual growth rates have been steadily declining... and have averaged 4.2% from 2008 to 2012, a decline of 4.6 percentage points from the peak. But, based on patterns of real GDP changes and inflation, our model predicts that the growth rate in health spending would have been expected to decline by 3.6 percentage points over that same period. In other words, about three-quarters (77%) of the recent decline in health spending growth can be explained by changes in the broader economy.

The study then uses the model to illustrate what might happen in the future:

If the researchers are right, both the decline in health care spending growth and in "excess" growth -- that is, health care spending growth above GDP growth -- are likely to be reversed over the coming years.

Of course, it's possible that there's some trend that this analysis doesn't pick up on (the authors cite both changes in the delivery system and the rise of consumer-directed health care plans as possible factors in curbing spending growth). But it's a reminder that the health care system is just as vulnerable to the workings of the macroeconomy as all other industries.