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Is the Current Trend of Price Stability in Healthcare Costs Permanent?

In a “Man Bites Dog” lead, we’re pleased to announce that healthcare spending appears to be declining. As of now.

Earlier this month, the Wall Street Journal editorialized that the growth in health spending has leveled out at about 4% over the last three years. That’s lower than it’s been for 40 years and way down from its mark of 6% to 10% over the last decade.

At first glance it looks like the decline is tied to the continuing weak economy: fewer jobs mean less employer-subsidized health insurance and medical treatment. In fact, according to the Journal, the Kaiser Family Foundation recently estimated that nearly 80% of the health spending slowdown can be attributed to economic conditions.

If that’s the case, then we can expect an explosion in health care costs as the economy improves. Right? Not so fast.

There is also evidence that the change in healthcare spending has been going on for longer than thought and that it may indicate a permanent leveling of cost. If so, this would be contrary to everything we think about healthcare.

In fact, another economic model now shows that the slowdown has been going on for a long time. That it is systemic, durable and, perhaps, permanent. Economist David Cutlerand Nikhil Sagni say that their model shows that the recession of 2007 only accounts for about 45% of the decline in spending. That’s about half of the Kaiser estimate.

Taking it a step further, another model by Michael Chernow of the Harvard Medical School has suggested that the spending decline is the result of market choice and competition, introduced into the healthcare market beginning in the last decade. Investigating changes in the large market insurance business he found that these firms did better than smaller ones controlling cost through the use of higher deductibles and co-pays, as well as innovative program designs. These changes account for 20% of the slowdown, the model suggests.

When patients, rather than a third party, are empowered to make their own spending decisions about healthcare, they tend to be more frugal. Over the long haul this lowers overall costs, the models seem to suggest.

During World War II the War Labor Board determined that wage and price controls did not apply to fringe benefits, including health insurance. Providing health insurance was a way employers could retain workers—by raising their overall standard of living without fattening the pay envelop.  In today’s healthcare market there are those who suggest that large companies can reverse the effect of the Board’s wartime decision by plowing money saved by these new high deductible/co-pay models into workers’ paychecks. What would be nice would be a study to validate whether this theory is true.

Which brings us back to today’s current healthcare morass. The Affordable Care Act outlaws most of the types of plan innovation that seem responsible for the slowdown in health spending. For example, the law’s arcane rules outlaw what the government considers to be excessive cost-sharing with beneficiaries.  There go the higher deductibles and co-pays.

Cutler estimates that entitlement spending in healthcare will be about three-quarters of a trillion dollars lower over the next decade if the current slowdown in spending continues. But that doesn’t seem possible under the current ACA rules.

Look for costs to start rising again as the ACA kicks in in 2014. The government will mitigate this effect on consumers by injecting money to inflate the healthcare system. But that money will come out of the left pocket of consumers and go back into their right pocket as a subsidy. The resulting loss in price stability will be greater than the entitlement gain.