Revenue limits, structural changes lower healthcare spending

Underlying changes in some healthcare cost factors appear to be taking root and have some economists wondering if the slowdown in healthcare spending growth may last beyond the near term.
Fundamental changes in the way consumers have obtained insurance in addition to the economic downturn have taken revenue out of the healthcare system and reduced the revenue growth that was available to providers, said John Holahan, an Institute fellow at the Urban Institute's Health Policy Center.
"This has forced them to change in fairly significant ways. Is this permanent? It probably depends on what happens with these revenue constraints," he said at a recent Altarum Institute forum at which a number of economists discussed the slowed growth in healthcare spending.
Employer coverage for non-elderly fell from 69 percent to 58 percent in 2000-2011. The Medicaid population grew by 19 million, the uninsured by 12 million. Medicare enrollment grew by 2.4 percent per year.
"This means you have fewer people in better-paying, private, commercial health insurance plans, and many more people in public coverage. So both the coverage changes and income changes has affected the revenues pouring into the health system," Holahan said, leading providers to seek efficiencies.
Medicare is setting prices in a price-conscious way, more so than private payers, with physicians paid a set fee schedule, said Chapin White, senior researcher, Center for Studying Health System Change. "Providers are paid less and being paid more in bundled payment systems," he said.
The Affordable Care Act also puts the brakes on cost growth. As of 2011, every year when Medicare updates the prices it pays for services, it also subtracts an adjustment for productivity increases.
"The expectation that is now baked into the Medicare system is that hospitals and nursing homes will get more productive in line with the rest of the economy," White said. "The productivity adjustments don't get a lot of attention, 1 percent per year price cut, but it will have a profound effect on Medicare spending trends."
Other ACA provisions, such as for post-acute bundling, accountable care organizations (ACOs), value-based payment modifiers and readmission penalties don't get at the heart of spending but "are planting flags for big future steps," he said.
Besides reducing payments in Medicare, ACA will shift people to Medicaid and health insurance exchanges, both of which will be stingier in provider payments than typical private insurance today, White said. The Cadillac tax in 2018 will also provide a hard ceiling for generous employer-sponsored insurance.
In recent years, Medicare and Medicaid have had rapid increases in enrollment but lower spending per enrollee than the private sector, said Stephen Zuckerman, co-director and senior fellow for the Urban Institute's Health Policy Center.
"When hospitals have less pressure from non-Medicare payers, they have high costs. Private insurers do not seem to have the leverage to drive provider prices down," he said, adding that there is a great deal of public and private sector activity to try to control costs.
The recession accounted for about one third of the slowdown in medical spending, but economic models include a fairly large unexplained segment for the slowdown in spending, said David Cutler, economics professor at Harvard University.
Lower payments mixed with financial incentives to providers, more cost sharing by patients and fewer blockbuster technologies and products on the horizon that payers must pay for to treat patients are among the structural changes that he and other economists have noted.
Hospital readmission rates have already declined. "As soon as we started paying differently, the rate went down quickly from the 30-percent average Medicare readmission rate," Cutler said.
He surmised, "Nobody knows for sure, but I think if you look at the weight of what's going on, another way of saying it is, the world would have to change for costs to go up again."
But not everyone believes the lower spending growth will last.
When economic growth is slower, healthcare spending follows and vice versa, said Gene Steuerle, an economist at the Urban Institute and former senior treasury tax official for President George H.W. Bush. "If we don't change policy, spending growth will return," he said.