It’s the growth rate, my friend.

Posted by Nolan Miller on Sep 17, 2009

Filed Under (Health Care)

Last time I talked about the level of cost in U.S. health care.  Health care costs are high, but I tried to make some arguments for why it might not be crazy for the U.S. to have higher health care costs than other countries.  But, let’s set that aside.  Why? Because the real issue in U.S. health care is not the level of cost, but the rate of cost growth.

Since 1975, U.S. GDP grew at an average real rate of 2.2% per year.  Health-care spending, on the other hand, grew at an average real rate of 4.2% per year.  The extra 2% per year accounted for health care growing from around 7% of GDP in 1975 to 15% of GDP today.  Why is does this matter?  Put simply, tax revenues grow at about the rate of GDP.  So, the revenue base that’s paying for health care is growing much more slowly than its cost.  This means that, even if we were to solve all of the problems with the level of health care cost today, we’d be right back in the same boat in a matter of years.

To see why, consider the following example.  In 2006, U.S. health care costs were about $5,700 per person.  Suppose that without impacting quality we could cut cost by 20%, to $4,560, saving $1140 per person.  This would be a huge success.  But, without addressing the excess growth issue, it would also be a temporary one.  Within about a decade we’d be fiscally right back where we are now.  In 10 years, the $4560 worth of revenue paying for health care would have grown to about $5670, while the $4560 worth of costs would have grown to $6880, totally eating up the original $1140 in savings.

And things would just get worse from there.  In 20 years, health care cost would have grown by an excess of $3000 over revenue.  In 30 years, costs would be about $15,700,  almost double the revenue base of $8760.

And, we haven’t even done anything to increase access or improve quality, both of which would likely increase the level of cost and quite possibly the growth rate as well.

Finally, the aging demographics in the U.S. mean that, if we don’t do anything to curb the rate of cost growth in the U.S., things will actually be even worse.  Since the elderly require relatively more health care, we should expect that as the proportion of the population that is elderly grows, the amount that we spend on health care will grown as well.

As I’ve said before, we’re not just spending more on health care, we’re also getting more.  Certainly, part of the growth in health care expenditures is due to the rapid pace of technological innovation, and the fact that each year the system comes up with new ways to improve and extend life.  But, it is becoming clear to even the strongest supporters of the status quo that something has to give.

There are a number of proposals that have the potential to slow the rate of health care cost growth.  One is payment reform.  Currently, we pay providers for providing more care.  Not surprisingly, this induces them to provide more care.  A system where providers are paid by the episode of care rather than for each service provided might slow the pace of cost growth.  Greater use of information technology, which reduces medical errors and streamlines care, might also help.  Increased investment in cost-effectiveness studies, which will tell us whether a particular procedure benefits patients, whether those benefits outweigh the costs, and, in situations where multiple treatments are available, which provides the greatest bang for our medical buck, also has the potential to lower cost growth.

There is also potential guidance to be found by studying examples of regions and providers that have managed to curb cost growth without sacrificing quality.  For example, a study by Elliott Fisher, Julie Bynum, and Jonathan Skinner that appeared earlier this year in the New England Journal of Medicine shows that there is substantial heterogeneity in growth rates across the U.S., and that some regions, like Salem OR, have managed to control cost growth, while others, like Miami FL, have had substantial excess cost growth.  Other studies have identified particular providers, like the Cleveland Clinic, that have kept costs low.  Of course, anytime you study a cross section, someone is going to have the lowest growth rate.  But, if these groups’ cost controls are real, rather than just statistical flukes, and if they can be replicated more broadly (which is not at all clear), then they might provide the key to solving health care’s most pressing problem.