We Can’t Bend the Cost Curve Without Talking About Costs

As the director of Altarum’s Center for Sustainable Health Spending, I am pleased to become a regular contributor to our Health Policy Forum. In the coming months, I hope my column will provide fresh insights on topics related to health spending, the health sector, and its relationship with the larger economy. In particular, we are excited to be releasing a new series of health sector economic indicators publications that will provide timely monthly tracking of health sector spending, employment, and prices. There is much to be learned from these data and they should prove particularly useful as the nation moves forward with, and continues to debate, health reform.

But let’s start with the data released earlier this month by our friends from the National Health Statistics Group at the Centers for Medicare and Medicaid Services showing that health spending accounted for 17.6 percent of the gross domestic product in 2009—up a full percentage point from 2008. There was a time when a 10 percent share was viewed as apocalyptic.  Indeed, I remember Princeton health economist Uwe Reinhardt joking, many years ago, that health care could conceivably reach 100% of GDP—we would all be doctors lying in hospital beds giving each other IVs, he said.

Why does this increasing share of GDP matter? For one thing, it means that the influence of the health sector on overall economic performance is growing. During recessions, the health sector plays a key stabilizing role. Since the start of the recession in December 2007, private sector health care employment has grown by 800,000 while all other employment has fallen by about 8 million. If health care represented a smaller share of the economy, the recession could have been worse.  The income from those health care jobs led to purchases that helped preserve jobs in other sectors.

During expansions, however, rising health care spending and costs are viewed as a drain on the economy as employers limit wage increases in order to fund ever-increasing health care insurance premiums. U.S. manufacturers trying to compete in the global marketplace view health care premiums, which tend to be more costly here than in other developed nations, as an extra burden.

Here is an interesting chart showing the growth in health spending and the growth in GDP over the last 20 years. Health spending grows faster than GDP in and around recessions (stabilizing the economy) but not between recessions. So the health sector stabilizes the economy during recessions and behaves itself between recessions. This would seem like a good thing, but there is a problem.

Chart showing the growth in health spending and the growth in GDP over the last 20 years

About half of health spending is publicly financed – primarily through Medicare and Medicaid but also through the tax treatment of employer-sponsored insurance. This large public share of health care financing is mostly unavoidable in a society that values access to care for everyone. Those with the most intensive health care needs (older Americans, persons with severe disabilities, and those in poverty) are typically unable to pay what their coverage is worth and, therefore, public funding is required.

But therein lies the problem. Between 1970 and 2005, federal spending on Medicare, Medicaid, and Social Security increased from 4 percent to 8 percent of GDP—largely due to increases in Medicare and Medicaid. This was almost perfectly offset by a drop in defense spending from 8 percent to 4 percent. The next 4 percent rise in Medicare, Medicaid, and Social Security as a share of GDP cannot be offset by a similar decline in defense spending, since that would zero out the defense budget altogether. In fact, as of 2010, the former has already increased to 10 percent of GDP while the latter has increased to 5. The growth in federal health care spending isn’t just a fiscal problem – it is the fiscal problem – and it ensures that an unbent health care cost curve is unsustainable.

The growing share of GDP and requirements for public funding are not the only aspects of the health sector that interest economists. Unlike in most other industries, innovation in health care tends to be cost-increasing rather than cost-reducing. I remember paying $2,000 for an Osborne personal computer in 1983 that—thanks to the innovation of the Internet (driven by PCs), I can find this historical information easily on Google—weighed 24 pounds and had only 64K of RAM. Compare that to your $200 cell phone with 100 times the memory and Internet access—times really have changed and the pace of progress in modern computing has been stunning.

Unfortunately, what works in other sectors of the economy does not always apply to health care, and it is very difficult to find cost reducing advancements in health care as easily as in personal electronics. For one thing, consumers don’t reward cost reducing innovations in health care because their insurer is often paying the bill. In addition, attempts to introduce cost-consciousness into health care spending run into a barrage of special interest and ethical concerns. One group’s cost savings are another group’s lost income and usually those at risk of losing income fight with greater enthusiasm. And how does one put a price on life?

These kinds of interests and ethics help explain why health reform legislation specifically ruled out consideration of costs by the new government organization set up to examine the comparative effectiveness of alternative health care treatments. They also help explain why discussion of how to control high end-of-life health care costs can turn into a political minefield (remember “death panels”?). Unfortunately, we are left trying to bend the cost curve without talking about costs.

My final observation relates to data that allow us to track the health sector of the economy and health spending in particular. Or perhaps I should say, the lack of timely data. As already mentioned, official estimates of national health expenditures from CMS were just released for calendar year 2009—a full one year lag that seems even longer when you consider that an annual spending figure is essentially just a mid-year average. Ten year annual forecasts are typically released by CMS in February that provide a pretty good indicator of what happened in 2010.

We believe that more timely data are needed, and this is why we will soon be launching our series of monthly estimates of health spending, employment, and prices with a fair amount of subsector detail. I will look forward to sharing insights from this information in subsequent blogs and help continue the discussion of how to bend the cost curve in health care spending.


Columnist Charles Roehrig is a health economist and director of the Altarum Center for Sustainable Health Spending. His column for the Health Policy Forum considers health economics issues and health spending. Columnists are regular contributors to the Health Policy Forum who pose their own opinions and policy positions in the realm of health care and health policy. As a leading nonprofit health care research and consulting institute dedicated to improving human health, Altarum encourages open discussion and debate about the many challenges in health care today. All postings to the Health Policy Forum (whether from employees or those outside the Institute) represent the views of the individual authors and/or organizations and do not necessarily represent the position, interests, strategy, or opinions of Altarum Institute. Altarum is a nonprofit, nonpartisan organization. No posting should be considered an endorsement by Altarum of individual candidates, political parties, opinions, or policy positions.

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