Prices for personal consumption expenditures (PCE) on health care goods and services rose just 1.1 percent over the twelve months ending in May 2013, the slowest rate of increase in nearly 50 years. The slowdown in PCE health care inflation has been widespread, with important contributions from two large components: hospital and nursing home services (which comprise 42 percent of total health care expenditures) and outpatient services (which comprise 34 percent of total health care expenditures). As the chart below shows, since March 2010, these two components of health spending have made notably smaller contributions to overall consumer health care inflation than in previous years.
The slowdown in consumer health care price inflation is consistent with a broad array of other evidence suggesting that the growth rate of health care costs is slowing:
- Data from the Bureau of Labor Statistics’ Employer Costs for Employee Compensation survey indicate that for private sector employers offering health insurance, the annualized growth rate of real (inflation-adjusted) costs for workers’ health insurance has slowed from 2.2 percent a year from 2006:Q4 to 2009:Q4 to 1.8 percent a year from 2009:Q4 to 2012:Q4, with a particularly marked slowdown occurring at smaller establishments. For establishments with fewer than 50 employees, employers’ real costs for workers’ health insurance grew just 1.0 percent a year from 2009:Q4 to 2012:Q4, half the rate observed over the preceding three years.
- During the past several years, the Congressional Budget Office reports that it “has made a series of downward adjustments to its projections of spending for Medicaid and Medicare.” For example, “mostly reflecting the slower growth in the programs’ spending in recent years,” CBO now expects combined spending on the two programs to be about $200 billion lower in 2020 than what it forecast three years ago.
- From 2009 to 2011, nationwide real per capita health expenditures grew at the slowest pace since reporting began in 1960.
- In 2012, premium growth for employer-sponsored insurance was at its lowest rate (3 percent) since the Medical Expenditure Panel Survey started in 1996.
- In 13 states that have publicly reported premiums for 2014, the average of the lowest-cost plan is nearly 20 percent below projections based on CBO premiums. This includes New York State, which recently announced that health insurance rates in 2014 will be at least 50 percent lower, on average, than the plans currently available in the state. These substantially more affordable plans will soon be available through the new Health Insurance Marketplace established by the Affordable Care Act.
In sum, data from across the economy – covering consumers, government, and private employers – point to the same conclusion: health care cost growth has slowed.
A mounting body of research finds that structural changes are driving a substantial part of the recent slowdown in health care cost growth, suggesting that the trend may persist. Moreover, the fact that the slowdown in cost growth reflects changes in both prices and utilization of medical care – and that the slowdown is apparent in many different aspects of the health care system – further suggests that structural changes are underway.
The Affordable Care Act includes a range of cost-saving, quality-improving measures. The law includes provisions intended to foster coordinated care, reduce preventable health complications during hospitalizations, and promote the adoption of more efficient health information technology. For instance:
- The Partnership for Patients program is a public-private partnership that aims to reduce hospital complications and readmissions across the nation through partnerships with more than 3,700 hospitals and thousands of other organizations of doctors, nurses, and community-based groups. Since the program was introduced in 2011, the hospital readmission rate within Medicare has fallen below its historical average.
- Under Accountable Care Organizations (ACOs), providers deliver care through organizations of physicians, nurses, hospitals and other providers responsible for the quality and cost of care to their patients over time. Medicare shares any savings with ACOs that meet rigorous quality standards. Currently, more than 4 million beneficiaries receive care from more than 240 ACOs participating in the Medicare Shared Savings Program and other related projects.
- The Hospital Value-Based Purchasing Program went into effect in October 2012. The program encourages more than 3,500 hospitals to provide high-quality care and reduces payments for hospitals exhibiting poor performance. Additionally, pay-for-reporting initiatives in which providers are rewarded for reporting clinical quality measures have been launched in virtually every Medicare payment category.
The Administration is committed to making further progress in the years ahead through the essential patient protections and cost-saving measures contained in the Affordable Care Act.
Alan B. Krueger is Chairman of the Council of Economic Advisers.