U.S. healthcare spending has grown dangerously out of control. Or has it?
According to a recent analysis by McKinsey and Company, total spending on U.S. healthcare in 2009 was $2.5 trillion, equivalent to 17.6 percent of the U.S. Gross Domestic Product. The U.S. spends more on healthcare, per capita and as a share of GDP, than any other nation in the world.
At the same time, however, the U.S. has experienced 8 consecutive years of declines in healthcare spending growth. The McKinsey research reveals that year-on-year healthcare spending growth in the U.S. fell from 9.5 percent in 2002 to 4.0 percent in 2009. In 2010, spending growth decline further to 3.9 percent.
So healthcare spending continues to grow in the U.S., but is that level of growth not a problem for the U.S. economy, or less of a problem than healthcare reformers claim?
The answer to both questions is no.
The McKinsey research adds a very important caveat to the revelation that U.S. healthcare spending growth has experienced a slowdown. McKinsey notes that healthcare spending continues to “exceed expected levels by roughly the same margin that it did in 2006.”
This is a critical insight, for the organization has created a measure it terms ESAW, or Estimated Spending According to Wealth. ESAW models how much a nation would be expected to spend on healthcare based on per capita GDP. According to data compiled by the Organization for Economic Cooperation and Development, the United States spent 2.5 times more per capita on healthcare in 2009 than other developed nations. The McKinsey research reveals that 23 percent of total U.S. spending was above expected levels in 2009, compared to 22 percent of spending in 2006.
As the McKinsey report points out, since the U.S. economy grew more slowly during the same period at which healthcare spending growth grew slower, “the gap between the level of spending and what would be expected based on spending patterns in other countries and differences in per capita GDP actually grew.”
Indeed, by these lights, U.S. spending on healthcare in 2009 exceeded expected levels by $572 billion.
An assessment of this research brings me to the obligatory policy prescription: why the United States needs the Independent Payment Advisory Board (IPAB) mandated by the Affordable Care Act.
The IPAB has become a proverbial “political football” in the past year, but its intention is to check rising Medicare spending if per beneficiary growth in that spending exceeds target growth rates.
Congress, whether controlled by Democrats or Republicans, has shown itself incapable of stemming the growth of Medicare spending – hence the need for an independent panel such as IPAB. Beginning in 2013, the 15-member board must recommend specific steps annually to curb the growth in Medicare spending, but only if the projected annual Medicare growth rate exceeds the projected annual target determined by the chief actuary of the Centers for Medicare & Medicaid Services.
Unlike some of the more overheated charges by opponents of IPAB, the board will not have the power to “ration” care. In fact, IPAB cannot propose any recommendation that would ration care or raise revenues. It cannot offer proposals that increase Medicare beneficiary premiums or cost sharing, restrict Medicare benefits, or alter rules for Medicare eligibility.
The Medicare Payment Advisory Commission (MedPAC) currently makes recommendations to Congress about Medicare payment policies, but the proposals are ignored consistently by legislators, who are often beholden to those whose financial interests would be harmed by reductions in healthcare spending.
But given the data highlighted by the McKinsey research, it’s critical that a federal panel overseeing Medicare have more power to reign in spending than the relatively toothless MedPAC.
Would that a board like IPAB were not necessary. Unfortunately, a lack of political will has made it essential.