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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