The Facts about the Figures

Last week, the news business was in overdrive. Led by coverage of the Polar Vortex, Chris Christie’s Tollgate and Dennis Rodman’s North Korean basketball diplomacy, it also included a come-from behind win by Florida State to capture the BCS championship, release of former Defense Secretary Bob Gates tell all Duty and coverage of the Consumer Electronic Show in Vegas. Quite a week!

But drown out in the flurry was an important story:  a Health Affairs (January 2014 Vol. 33 No. 1) study reported total health spending in 2012 increased 3.7% to $2.8 trillion—the fourth year in row that health spending fell below 4%.  The news got a modest amount of attention, but a close look at the facts helps explain the figures:

  1. The slowdown in spending was not driven by lower utilization or demand. It was driven by lower Medicare payments to providers and lower costs for prescription drugs that lost their patents.
  2. The slowdown in spending was not the result of the Affordable Care Act: it’s only speculation to conclude otherwise. It’s simply too soon to know it’s impact.
  3. No one knows for sure if the spending slowdown will continue.

So what do the Facts about the Figures mean? Two immediate implications are clear:

It means efforts to reduce utilization must increase as the economy recovers and more are covered by insurance, or costs will soar. The health system is adaptive: when reimbursement is cut, the system finds ways to simply do more. And for the past four years, the slowdown in spending has been a function of paying less for what’s bought rather than reducing demand. As the economy recovers, and as more are covered by insurance, to control health spending, reducing utilization will be essential to slowing costs. That means avoidable readmissions and suboptimal outcomes, adherence to evidence-based guidelines to reduce unnecessary tests and procedures, intensified attention to fraud and waste, and value-based purchasing will take center stage.

And it means employers that provide employee insurance coverage will be activists to reduce unnecessary volume. Employers pay hidden taxes from cost shifting for employers and individuals without coverage, and key elements are tests, procedures and drugs for which their efficacy is unproven or questionable. Employers understand the math: volume times price. What they’ve missed is that much of the volume is supply-driven—‘when we build it, they come’ (sometimes without evidence that what’s recommended is what’s best). Supply-driven demand drives costs up for everyone. Employers will become activists about reducing utilization by understanding clinical appropriateness in addition to costs.

The fact that health care spending came in at 3.7% is good news: it could have been higher. But in the big scheme of health system transformation, it does not suggest costs are in check. The Facts about the Figures suggest otherwise.