Why Did Health Spending Slow Down Before It Sped Up?

by John Goodman,

Last quarter, spending on health care grew an astounding 9.9%. That’s the biggest percent change in healthcare spending since 1980.

What’s the reason? Many people blame it on the Affordable Care Act (ACA), more popularly known as ObamaCare.

But this assessment contrasts markedly with the picture the president painted for us only a few months back when he said that “health care costs are growing at the slowest rate in 50 years.” He and members of his administration attributed that to the ACA.

So which view is correct? Probably neither. It’s too soon for ObamaCare to have resulted in a big boost in spending. And the previous slowdown was underway over a decade. (See the chart).

Over the longer period, what does track the slowdown very closely are three other developments: the growth of Health Savings Accounts (HSAs), the growth of Health Reimbursement Accounts (HRAs) and the general trend toward higher deductibles. All three changes mean that patients are paying more medical bills out of their own pockets. And that has produced profound changes — both on the demand and the supply side of the market.

What about ObamaCare? Over the past three years almost all the significant features of the new legislation have increased, rather than reduced, health costs — providing risk pool insurance to the uninsurable, forcing private plans to cover more benefits, and adding such extras to Medicare as free “wellness exams” and closing the prescription drug “donut hole.” Serious people expect ObamaCare to increase costs even more in future years. Medicare’s actuaries project that ObamaCare will add $625 billion to total health care spending over the next decade. The RAND Corporation predicts that ObamaCare will increase health insurance costs by almost $2,000 by 2016.

The emergence of so many people paying for care with their own money is also changing the supply side of the market. Nationally, 1,300 walk in clinics post their prices and provide timely care. Free-standing emergency care clinics and Doc-in-the-Box outlets have now arisen to complement them. The first mail-order prescription drug organization, RX.com, was also driven by cash patients saving time and money. Walmart now offers $4 generic drugs financed by cash, not costly insurance. Phone and email consultation services are another development.

That reflects the success of market competition and incentives.

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