Warning Lights Flash on Health Care Spending

May 06, 2014 | By Neil Howe

This editorial originally appeared in Forbes.

The BEA’s latest release, which revealed that America’s GDP grew at a miserable 0.1% in Q1 2014, is actually even worse than it seems. If it hadn’t been for the fiscal menace of rising health-care spending, this figure would have been negative. Indeed, health-care spending has increasingly buoyed GDP figures since the summer of 2013, when monthly national health expenditures began steadily accelerating—from no more than about 4% (year over year) since 2008 to over 5% in November of last year and over 6% in January. In February, it jumped again to 6.8%, the highest monthly growth rate since 2008.

And health-care spending growth shows no sign of slowing down in the latest report. In Q1 2014, real health-care spending grew at an annual rate of 9.9%. That’s faster than any quarter since Q2 of 1980—back 34 years ago when Jimmy Carter was President. Once again, we see health care rapidly outpacing the rest of the economy. In January, reports Altarum, U.S. health spending hit 17.7% of GDP, an all-time high; once monthly GDP figures are available for February and March, we will certainly see this figure exceed 18.0%.

Claims by the Obama administration issued as recently as last November, to the effect that ACA (Obamacare) “is contributing to the recent slow growth in health-care prices and spending,” now seem at best awkwardly timed. The President’s decision at his April 1 press conference to include “health-care cost control” among ACA’s signal accomplishments—even as these new warning lights were flashing—seems odder still. As I predicted in 2013, Obamacare did succeed in enrolling sufficient numbers of young adults, despite the onerous price penalty  ACA exacts on youth. But cost acceleration is casting a dark shadow over ACA’s enrollment success.

What’s pushing health-care spending back up again? First and foremost, the state of the economy. As a rule, real health-care spending growth tends to dip sharply (with roughly a two-year lag) when the economy enters a recession and then resurges (with a similar lag) when it exits a recession. This is what happened in the early-‘80s Reagan recession, again in the early-‘90s Bush, Sr. recession, and again in recent years—though this time the resurgence was delayed due to the severity of the 2008-09 downturn.

In every instance, political leaders prematurely declared victory in their efforts to control health-care spending. In 1984, HHS Secretary Margaret Heckler famously declared that new Medicare reforms (“diagnosis related groups”) had at last “broken the back of the health-care inflation monster.” That euphoria was short-lived. In 1994, Clinton officials heralded a “cost revolution” enabled by a new “HMO model.” Those hopes died as well—along with the HMO model and “HillaryCare”—a few years later. Now it’s Obamacare, whose designers are taking credit for at last controlling costs even as the latest soaring cost numbers are published.

To be sure, there is one important difference. Today, the reform itself is partly responsible for the new cost spike. Even ACA’s supporters concede what the BEA economists report—that the enrollment of millions of uninsured Americans is causing spending to rise more than it otherwise would. These supporters simply argue that other parts of ACA—everything from Medicare cuts in Advantage plans and physician payments to innovative “accountable care organizations” (ACOs)—will end up saving more money in the long run. Indeed, such ultimate net savings do hold up on paper (the CBO just re­con­firmed them in a new report).

But these net savings depend upon two critical assumptions if we want them to hold up in the real world. The first assumption is that providers and patients will tolerate the reformers’ menu of cuts and restrictions: Maybe they will, but they have not in the past. Personally, I doubt Americans will accept sizable cuts unless they are linked to new payment and pricing models, including consumer choice and capitation. Exchanges and ACOs are steps in that direction. Physician reimbursement cuts are not.

The second assumption is that the underlying health-care cost climate will remain as quiescent as it has been in recent years—and it’s here where we need to heed the new warning lights. Once again, we have been lulled by a false sense of complacency into underestimating the size of our cost challenge. According to scholars at a symposium earlier this month at Brookings, hardly a den of Obama detractors, a vast and costly new wave of medical inventions is about to push up costs across the board —everything from an “orphan” Hepatitis C drug at $1,000 per pill to proton beam therapy at $50,000 per treatment to left ventricular assistance devices at around $300,000 per procedure. As the new GDP numbers indicate, policymakers (and voters) have not yet even begun to make real choices.