Everything You Need to Know About the Healthcare Slowdown

Healthcare spending only increased 3.7 percent in 2012, and actually fell as a share of GDP. Will it last or is this just a blip?


Healthcare spending is growing slower than the economy for the first time since 1997. And nobody knows why.

It might just be the shadow of the Great Recession. Or a move towards more high-deductible plans. Or maybe, just maybe, Obamacare's cost controls. There's evidence for all of them. But, contra Matt Yglesias, it does matter which is most responsible, because that tells us how long this slowdown might last. So let's take a look at them all, and try to figure out if the cost-curve is bending or just taking a break from its march to infinity and beyond.

The best evidence that Obamacare isn't causing our healthcare slowdown is that it isn't our slowdown. It's the world's slowdown.

As you can see in the chart below from the OECD, healthcare growth rates fell almost everywhere between 2009 and 2011. Anything big happen then? Oh, that's right, the end of a once-in-three-generations (we hope) financial crisis.

Take another look at the countries with the least healthcare growth after 2009. It's a who's-who of economies that got obliterated by the crisis: Greece, Ireland, Iceland, Estonia, and Portugal. In other words, it sure seems like the recession must explain a big chunk of this global slowdown. And it seems even more like if you directly compare GDP growth with healthcare growth over this period. As you can see below, there's a pretty strong relationship between the two—economic growth explains about half of healthcare growth after the crash (Note: The U.S. is the yellow dot).

But some of our slowdown is ours, and not just because of the Great Recession. As former OMB chief Peter Orszag points out, Medicare spending—which shouldn't depend on the state of the economy—actually fell in 2013. Why? Well, we don't really know, but we hope that it's related to the two recent mini-revolutions in our healthcare system: making people pay more, but not for things they don't need.

It's a simple enough idea. Make people pay more out-of-pocket, and they won't spend as much on healthcare. They'll be price-conscious, and won't order tests they don't really need—or so the story goes. Now, there's only so much this can save when the sickest 5 percent of patients account for half of all healthcare spending. But it can still help. It has. Economists Amitabh Chandra, Jonathan Holmes, and Jonathan Skinner report in their Brookings paper that higher deductibles have indeed slowed private insurance utilization the past few years. But how much higher? Well, a lot. As you can see in the chart below from Chandra, Holmes, and Skinner, average deductibles have almost doubled since 2006. A big part of that is companies looking to pass healthcare costs onto their employees during the Great Recession and our not-so-great recovery.

But it's not enough to give patients incentives to use less care. You have to give doctors incentives to offer better care too. More cost-effective care. Right now, we have a "fee-for-service" model where doctors get paid more the more tests they perform, regardless of whether those tests were necessary.

Obamacare tries to change that by changing Medicare. It's set up doctor networks called Accountable Care Organizations (ACOs) that try to coordinate care to make it more efficient—along with offering bonuses for keeping costs below target. Now, we don't know if this is going to work, but there are already some encouraging signs. Medicare's hospital readmission rate, for one, has already fallen well below its 2007-11 average now that they have a financial reason to do so. In other words, hospitals are making sure patients keep getting the care they need after they leave, so they don't need to come back. It's not sexy, but getting a million little incentives like this right will be the difference between "bending the cost-curve" or not.

Rising healthcare costs are the biggest threat to our fiscal future. But if the current slowdown continues, that threat mostly disappears. So the trillion dollar question is whether this is a blip or the start of a trend. It's hard to say. It's true that the recession, a drop-off in new and expensive drugs, and one-time savings from higher deductibles have all been big parts of this slowdown. And they're big parts that will go away. But it's also true that Obamacare's reforms have played a part, and will continue to do so. Not so much that costs keep growing this slowly, but they don't need to for us to avoid a fiscal crunch. They just need to grow slower—like Medicare has. Its spending has been flat the past year, and that has very little, if anything, to do with the recession. Now maybe it will start quickly increasing again, and this all will be moot. But maybe not. Maybe the long-term cost-curve is bending, and our long-term budget outlook isn't that scary after all.

The craziest thing is that it's not. It's just optimistic.