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The Overhyped Health Cost Slowdown

January 10, 2014

By Yevgeniy Feyman

The latest National Health Expenditure Accounts report, released by the Centers for Medicare and Medicaid Services (CMS), shows some of the slowest health-care spending growth in half a century. Media outlets are trumpeting the finding that health spending has actually fallen as a share of GDP -- from 17.34 percent in 2011 to 17.2 in 2012 -- suggesting that health care is taking a smaller chunk out of Americans’ paychecks. The numbers were also hailed by the administration, which was happy to credit the Affordable Care Act with the slowdown despite definitive findings that the law’s implementation is not far enough along to cause such a change.

Even if we take the CMS report at face value, there are reasons to think it’s not that remarkable. The Milliman Medical Index, for instance, shows health-care costs for a typical family of four were a staggering $8,584 in 2012 -- up 26 percent from $6,824 in 2009 (these numbers only represent the employee share of costs). And the CMS data themselves show per capita spending (including all sources) growing 3 percent -- from $8,658 in 2011 to $8,915 in 2012.

But are health-care costs really declining relative to GDP? It’s an important question: If health-care growth outstrips GDP growth over time, it holds back spending on other vital priorities. The good news is that the answer is yes; the bad news is that the fairly substantial drop reported by CMS was inflated by statistical revisions that were recently made to the way we calculate GDP.

GDP represents what economists call the "value added" from the production of all goods and services in a country. There are many assumptions involved in calculating this number. One such assumption was changed -- quite drastically -- in 2013.

The agency responsible for compiling the nation’s economic accounts -- the Bureau of Economic Analysis (BEA) -- has kept, for many years, a "satellite account" of research-and-development spending. Prior to 2013, R&D spending was either factored into consumption expenditures or classified as "intermediate goods." Both of these categories are factored into GDP -- but intermediate goods are included indirectly.

In 2013, however, the BEA announced that it would now be "capitalizing" all R&D spending -- that is, treating it as fixed investment, which is added to the GDP equation. The effect, for better or worse, is to significantly increase GDP for most years, with a larger absolute increase in later years: The upward revision to GDP in 2011 was $458 billion, while in 2012 it was $560 billion.

So what does this mean when it comes to looking at health-care spending?

For starters, it generally makes the ratio of health-care spending to GDP look smaller. This happens because the denominator (GDP) gets inflated while the numerator (health-care spending) stays the same. But more importantly, because GDP in later years gets increased more than GDP in earlier years, these revisions also reduce the apparent growth of health-care spending as a proportion of GDP over time.

Netting out the BEA revisions to GDP in 2011 and 2012 reveals a drop of 0.05 percentage points in health-care spending’s share of GDP (17.86 percent to 17.81 percent) -- just over a third of the previous 0.14-point decline.

CMS statisticians understand these changes, and their analysis is nuanced. They point out that the relative slowdown in spending is largely due to the lagging effects of the 2009 recession and other "one-off" events -- like one-time reductions in federal payments to skilled nursing homes, drug-patent expirations, and the expiration of enhanced federal matching rates for Medicaid -- and that the slowdown in private health-insurance costs is driven by slower overall growth in enrollment and greater adoption of high-deductible health plans. In fact, a CMS economist even noted that the ACA increased spending from 2010 to 2012 by 0.1 percent.

Is health-care spending growth slowing? Undoubtedly. It’s some of the slowest growth in half a century, and costs are declining slightly relative to GDP even when the older method is used. Is the slowdown permanent, or at all attributable to Obamacare? The answer is likely no, on both counts. The reality is that we don’t know which of the multitude of potential factors is causing a slowdown -- but that’s not going to stop the president and other politicians from distorting the facts.

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