Obamacare and the Weak Economy Are Slowing Health Care Spending Growth

Americans' health care spending grew last year at the lowest rate ever recorded, thanks to the sluggish economic recovery as well as Obamacare.

Health care spending grew by just 3.6 percent in 2013, according to new federal data released Wednesday. That's the lowest year-to-year increase on record, and it makes 2013 the fifth consecutive year of historically low growth in health care spending.

Much of the slowed growth rate is owing to the sluggish economy: With family finances tight, consumers have been more cautious on health spending. But the Affordable Care Act is also playing a part, as programs aimed to boost efficiency and cut delivery costs come online.

Health care is a huge part of the U.S. economy—about 17 percent, according to Wednesday's report. In the past, health care spending has often grown so fast that health care not only cost a lot more every year but also ate up a bigger and bigger share of the entire economy. Health programs are also a huge part of the federal budget, and if we can keep health care spending under control, it would help close the federal spending-revenue gap.

So, Wednesday's report, delivered by actuaries at the Centers for Medicare and Medicaid Services, is mostly good news. But the big question is whether we can keep it that way—especially if the economy hits full throttle.

Here's what the latest figures tell us.

We spend a ton of money on health care

All told, the U.S. spent $2.9 trillion on health care last year, according to the National Health Expenditures report. Private insurance was the biggest single chunk of health care spending, clocking in at roughly $962 billion, followed by Medicare at $586 billion.

That's a lot of money, and spending generally increases every year—but the pace of those increases is slowing. And, as the chart below shows, the slowdown is widespread: Total spending growth was lower last year than the year before, as was growth in private insurance and Medicare. Medicaid was the only big-ticket program that saw spending grow more in 2013 than it did in 2012.

+ The growth in U.S. health expenditures slowed in 2013

This usually happens after a recession

The current slowdown in health care spending began in 2009, after the economy bottomed out and then slowly began to recover. That wasn't especially surprising: Historically, changes in health care spending lag a few years behind the broader economy. So health spending generally stays relatively flat in the first few years after a recession—as it's doing now.

CMS's actuaries said the slow pace of the economic recovery helps explain why health spending is still growing slowly. The fact that health care is holding steady as a share of the economy is "not unique and [is] consistent with historical patterns," Anne Martin of CMS said Wednesday.

Obamacare is helping

Although the slow economic recovery helps explain part of the trend in health care spending, it doesn't fully explain why the current slowdown is so dramatic. Again, health care spending growth in 2013 was the lowest CMS has ever seen, and the agency has been tracking this since the 1960s. There have been plenty of recessions since then, but health spending has never grown this slowly before.

+ After a recession, the growth in health care spending tracks with the overall economy.

Obamacare is contributing to slower spending growth, the actuaries said. The law made direct cuts in Medicare payments to hospitals, doctors, and other health care providers, which have saved the program billions of dollars. The law also began penalizing hospitals when they have to readmit someone they just treated, and readmissions are down as a result.

The automatic budget cuts known as sequestration also took a bite out of Medicare spending. And more people with private insurance are switching to plans with high deductibles, reducing their spending on premiums and, in some cases, health care services.

Prices are growing slowly

Health care spending reflects two factors: the underlying cost of health care, and the number of people who are using health care services.

As we've gotten moved further past the recession, the use of health care services has picked up. Utilization grew faster in 2012 and 2013 than it did between 2009 and 2011, which makes sense—more people are finding jobs, giving them access to health benefits.

But health care prices have grown more slowly in the past two years than they did at the beginning of the recovery, and that's a big part of the reason spending is so stable, even though the demand for health care is increasing.

+ Demand for health care is growing faster than health care prices.

Spending on hospitals and on doctors, which combine for more than half of all expenses, grew more slowly in 2013 than 2012, according to CMS. In both cases, low price growth—much of it enforced by Medicare cuts—was a driving factor.

+ Hospitals and doctors make up about half of all health expenditures.

No one knows whether it will last

CMS's actuaries wouldn't make any predictions about 2014's overall spending growth, but there are good reasons to expect spending to pick up steam this year.

Wednesday's figures are from 2013, the last year before Obamacare's coverage expansion kicked in. So, when this year's figures are released, expect to see a big spike in Medicaid spending.

Total health care spending has historically quickened as the economy improves, the actuaries noted, and the economy has improved this year. And millions of people are paying insurance premiums for the first time, with help from federal subsidies, and that logically, would likely mean more total spending on insurance premiums.

But "at the same time, there have been and will continue to be forces that keep medical price growth low, particularly for Medicare," the CMS actuaries said. And the shift toward high-deductible insurance plans is accelerating, which could counteract higher spending from increased enrollment in private insurance.