1. Health Care Spending Growth
Michael Chernew
April 18, 2012

2. Definitional issues matter
Focus on spending at the population (national) level (i.e., Price x Quantity), not
Spending per unit of service [i.e. Price]
Cost of producing a unit of service
Spending for a disease cohort
Distinguish between total spending or government spending
Total spending is the most comprehensive
Government spending causes most alarm
Taxes

3. Data

4. Health Care Spending is not Sustainable

5. Excess Spending Growth
Average annual growth in per capita health expenditures
4.0%
3.6%
5.6%
4.2%
4.9%
3.0%
3.2%
Average annual growth in per capita GDP
3.1%
1.5%
2.7%
2.0%
2.1%
0.5%
Excess growth in health expenditures
0.9
2.1
2.9
2.2
1.4
2.7
Share of per capita Income Growth Devoted to Health Care
5.3%
5.5%
12.9%
16.5%
25.5%
18.7%
91.5%
2005 Dollars (adjusted using GDP deflator)
Source: Spending and population data obtained from Centers for Medicare & Medicaid Services
National Health Expenditures Data, 2011 and Newhouse (1992).

6. Consequences of Higher Taxes
If finance higher health care spending by taxes:
Marginal tax rates of high income earners could rise to 70% by 2060
GDP declines(relative to trend) by 11%.
Magnitudes depend on the exact assumptions about tax policy
Source: Baicker and Skinner: 2011: Assumes health care spending growth
consistent with 2010 CBO long run forecast

7. Private Health Care Spending is not Sustainable

8. Concepts and Evidence

9. Slowing spending growth
High spending, rapid growth
Low spending, rapid growth
Low spending, slow growth
Time

10. Level vs. Growth

11. Change in Medicare Spending vs. Percentage PCPs

12. Drivers of Spending Growth

13. Could obesity be driving spending
Probably contributes to spending growth
The effects interact with technology
Costs were growing faster than real GDP for EVERY 10 year period since WWII
Even before obesity epidemic
If the only change between 1987 and 2001 were BMI, then real, per capita spending would have risen ~ 1%/ year

14. Long run drivers of spending growth
Medical technology
New knowledge (and associated stuff)
Less important factors
Prices
Aging
Rising incomes
More generous coverage (static effects)
Inefficiency
Inappropriate use
Liability

15. Types of technology changes
: little ticket items
lab tests
X-Rays
: big ticket items
CABG
C-section
radiation & chemotherapy for breast cancer
Early and Mid 1990s
Pharmaceuticals
2000’s
Imaging,
Biologics

16. Myth: In Other Industries Technology Lowers Spending
Do not confuse price (cost per unit) with overall spending
Computers
Prices fall: Spending rises
Demand is crucial to determine effects of technology on spending

17. Benefits May Justify Cost
Slowing spending growth requires us to slow growth in price or quantity
Determining when to apply medical technologies is crucial
Average value of technology (widely viewed as great) may differ from marginal value (may be small)
Knowing when to apply technology is crucial
Our goal must be to promote ‘value’

18. Technology Reflects the System
Insurance
Cost Containment
Can we change the system to preserve innovation but manage new knowledge more efficiently?

19. Implications
Reductions in the level of spending are important, maybe VERY important, but…
Determinants of spending growth often differ from determinants of level of spending
Strategies to control spending growth must be either:
Continual one time savings
Fundamental environmental change
Public spending growth can be controlled by shifting spending to patients