Recent Trends in Health Care Costs Council of Economic Advisers

September 24, 2014

I. Recent Progress on Health Costs

The Three Years After 2010 Saw the Slowest Growth in Real Per Capita National Health Expenditures on Record

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From 2010 through 2013, real per capita national health expenditures grew at an annual rate of just 1.1 percent, the slowest rate for any three-year period on record and well below the historical average rate of 4.6 percent from 1960-2010.

Note: 2013 is a CMS projection. Health care spending data from the Bureau of Economic Analysis indicates that spending growth came in very close to CMS’ projection.Source: CMS Office of the Actuary, National Health Expenditure Accounts and Projections; Bureau of Economic Analysis, National Income and Product Accounts; CEA calculations.

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1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Growth in Real Per Capita National Health ExpendituresYear-over-year percent growth

2013

Health Care Spending Growth Slowed in Both the Public and Private Sectors

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The dramatic slowdown in spending by Medicare beneficiaries, who are more insulated from economic trends, is strong evidence that the slowdown resulted in part from structural changes in the health care system, not just the deep recession.

Note: 2013 data are CMS projections. Health care spending data from the Bureau of Economic Analysis indicates that spending growth came in very close to CMS’ projection.Source: CMS Office of the Actuary, National Health Expenditure Accounts and Projections; Bureau of Economic Analysis, National Income and Product Accounts; CEA calculations.

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1

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Private Insurance Medicare Medicaid

2000-2007

2007-2010

2010-2013

Growth in Real Per Enrollee Health Spending by PayerAverage annual percent growth

Slow Health Cost Growth Has Continued, Even After Businesses Have Added 10 Million Jobs Over 54 Straight Months of Private-Sector Job Growth

4Source: Bureau of Labor Statistics.

The recession is now five years in the past, and the economy has added 2.4 million private-sector jobs and cut the unemployment rate by 1.1 percentage points over the last year. Yet slow growth in health care costs is continuing.

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200

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Jan-07 Jan-09 Jan-11 Jan-13

Monthly Change in Private Payroll EmploymentThousands

Aug-14

Affordable Care Act Medicare Payment Reforms are Playing a Role in the Recent Slow Growth of Medicare Spending

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The Affordable Care Act gave hospitals a financial incentive to reduce the number of “readmissions,” cases in which a patient returns to the hospital soon after discharge. Readmission rates have fallen sharply as these incentives have taken effect, corresponding to 150,000 fewer readmissions in 2012 and 2013.

Source: Centers for Medicare and Medicaid Services.

II. Economic Benefits of Slower Health Cost Growth

Even if Only a Portion of the Health Care Spending Slowdown Persists, the Resulting Savings will be Extremely Large

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In a conservative scenario in which as little as one-third of the recent slowdown persists, national health expenditures would be $1,200 per person lower in 2023 than if spending growth returned to its prior trend.

Source: CMS Office of the Actuary, National Health Expenditure Accounts and Projections; Bureau of Economic Analysis, National Income and Product Accounts; CEA calculations.

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2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Annual Per-Person Savings if One-Third of the Health Care Spending Slowdown Persists

2013 dollars

Slower Growth in Premiums in Employer Coverage Makes It Easier for Businesses to Hire and Pay a Good Wage

8Source: Kaiser Family Foundation and Health Research and Education Trust, Employer Health Benefits Survey.

In 2014, employer premiums grew at the slowest rate since the KFF/HRET survey began in 1999. If premiums growth had matched its 2000-2010 average since 2010, the average premium would be $1,800 higher today. Lower premiums make it easier for employers to add jobs today and ultimately translate into bigger paychecks for workers.

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8.7

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2000 2000-2010 2010-2014 2014

Growth in Premiums for Employer-Based Family CoverageAverage annual percent increase

Nominal

Real

Slow Growth in Medicare Spending Has Kept Medicare Beneficiaries’ Premiums Flat for Several Years Running

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Medicare beneficiaries’ premiums are set to cover a fixed share of program costs. Slow growth in Medicare program costs has kept beneficiaries’ premiums for Part B & D approximately flat for several years running, and this is projected to continue into 2015.

Note: The 2015 Part B Premium is an estimate by the Medicare Trustees. The Part B premium in 2010 and 2011 was distorted by the program’s “hold harmless” requirement.Source: Centers for Medicare and Medicaid Services; Bureau of Economic Analysis; CEA calculations.

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2000 2002 2004 2006 2008 2010 2012 2014

Real Medicare Part B & D Monthly Premiums2014 $

Medicare Part B Standard Premium

Medicare Part D Base Premium

2015*

Slow Growth in Health Care Spending Has Caused CBO to Sharply Reduce its Projections of Future Medicare and Medicaid Spending

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Since August 2010, the Congressional Budget Office has reduced its estimate of combined Medicare and Medicaid spending in 2020 by $188 billion. These revisions primarily reflect “technical” changes in response to slower growth in health care costs.

Note: The plotted estimates reflect adjustments to CBO’s original GDP estimates to reflect the comprehensive GDP revisions in July 2013. Source: Congressional Budget Office.

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2014 2016 2018 2020 2022 2024

Recent Congressional Budget Office Projections of Medicare and Medicaid Outlays

Percent of GDP

Aug-10Aug-11

Aug-12

May-13

Aug-14

Directly “Scored” Effects of the Affordable Care Act Have Dramatically Improved Our Long-Term Budget Outlook

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Over law’s second decade, CBO projects that the law will shave 0.5 percent of GDP from the deficit each year, on average. Lower long-term deficits boost national saving, thereby increasing capital accumulation and reducing foreign borrowing, which raises national income over time.

Source: Congressional Budget Office; CEA calculations.

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2013-2022 2023-2032

Deficit Reduction from the ACA Over Two DecadesChange in the deficit (billions)

III. The Near-Term Outlook for Health Costs

Health Care Unit Prices: Historically Slow Health Care Price Inflation is Continuing

13Source: Bureau of Economic Analysis, National Income and Product Accounts; CEA calculations.

Since the ACA became law, health care prices have risen at the slowest rate in nearly 50 years, a trend that is continuing. A significant fraction of the recent slowdown in health care price inflation can be linked to Medicare reforms in the Affordable Care Act.

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1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Health Care Price Inflation versus General Price InflationYear-over-year inflation rate

Health care goods and services

All consumer goods and services

Jul-14

Health Care Per-Enrollee Costs of Coverage: Slow Growth in Both the Public and Private Sectors

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Note: Fiscal-year-to-date trend also includes Medicare Part D.Source: Bureau of Labor Statistics, Employment Cost Index; CMS Office of the Actuary, Trustees Report and National Health Expenditure Projections; Bureau of Economic Analysis, National Income and Product Accounts; CBO, Monthly Budget Review; CEA calculations.

The total cost of health care coverage to families reflect both health care unit prices and per-enrollee health care utilization. Measures that capture both of these factors continue to show very slow growth in both the public and private sectors.

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1990 1995 2000 2005 2010 2015

Medicare Part A & B spending per beneficiary

Real Costs of Health Care CoverageYear-over-year percent increase

Employer hourly health benefit costs

FY14 YTD

2014:Q2

Health Care Aggregate Spending: Expanded Coverage Will Cause a One-Time Increase in Total Spending

15Note: 2013 is also a CMS projection. Health care spending data from the Bureau of Economic Analysis indicates that spending growth came in very close to CMS’ projection.Source: CMS Office of the Actuary, National Health Expenditure Accounts and Projections; Bureau of Economic Analysis, National Income and Product Accounts; CEA calculations.

Aggregate health care spending grew slowly through early 2014, reflecting continued slow growth in per-enrollee costs. Expanded coverage under the ACA will drive faster growth in aggregate spending until insurance coverage stabilizes at its new higher level. The added spending is benefiting the newly insured and boosting short-run growth.

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1986 1991 1996 2001 2006 2011 2016

Real Per Capita National Health Expenditure Growth

CMS OACT projections for

2014-2016

Year-over-year percent growth

Historical average,1960-2010

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1986 1991 1996 2001 2006 2011 2016

Percent of Population Without Health Insurance

CMS OACT projections for

2014-2016

Percent