New Paper Documents Continued Rise in Health Care Spending

September 19, 2013
By Doug Gavel, HKS Communications

The recent slowdown in national health care cost growth rates in the United States is highly unlikely to continue for long. That is the conclusion in a new research paper co-authored by Harvard Kennedy School Professor Amitabh Chandra.

In "Is This Time Different? The Slowdown in Healthcare Spending,” Chandra and his co-authors examine a range of factors that affect the nation's health care spending to determine whether current downward trends are sustainable. "We first study trends in a variety of measures of U.S. health care, including personal health expenditures, total health spending, health care prices and quantities, and factor inputs such as employment in the health care sector," Chandra writes.

Health care spending currently consumes nearly 18 percent of the nation's gross domestic product (GPD), but growth rates have slowed over the past eight-ten years, Chandra notes, at a time when the great recession was slowing the economy overall and changes in Medicare reimbursements were taking effect. But Chandra and his co-authors argue that since “57 percent of overall health care expenditures are labor costs, it seems unlikely that we would expect to see a permanent bending of the cost curve without a commensurate shift in employment rates."

The researchers conclude that Americans can expect aggregate health care costs to continue rising at a rate of 1.2 percent above GDP, "lower than previous estimates but still on track to cause serious fiscal pain for the U.S. government and employees who bear the cost of higher premiums in the form of lower wages," they write.

Chandra argues that the study results provide some important lessons for policymakers.

"We recognize that the structure and balance of power among providers and insurers may be undergoing fundamental changes. These must be continued. For example, private insurers emboldened by an increase in market share, from getting more patients from exchanges and the Medicare Advantage program, may begin to push back against the coverage of unproven treatments," he writes. "Nascent signs of this are apparent in the isolated decisions by some private insurers to no longer cover for proton-beam therapy. Similarly, accountable care organizations in Medicare and the move towards bundled payments could encourage providers to switch from expensive and unproven therapies to cheaper ones."

"Yet ultimately, we still must be concerned about the long-term technology pipeline that could continue to deliver new and expensive technology with very modest medical benefits, but very poor value for the dollar," he concludes.

Amitabh Chandra is Professor of Public Policy at Harvard Kennedy School. His research focuses on productivity and cost-growth in healthcare, medical malpractice, and racial disparities in healthcare. Study co-authors are Jonathan Holmes, Fellow, Center for International Development; and Jonathan Skinner, James O. Freedman Presidential Professor of Economics, Dartmouth College.

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Amitabh Chandra, professor of public policy

Amitabh Chandra, professor of public policy

"We recognize that the structure and balance of power among providers and insurers may be undergoing fundamental changes. These must be continued."