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The Future of U.S. Health Care Spending

Brookings Institute Event Summary from the Market Institute

The Brookings Institution hosted a forum on April 11, 2014 to openly discuss the future of health care spending in the United States. Over a dozen economic and health care experts participated to try and answer three central themes: address the causes of the spending slowdown and the likelihood it will continue; its impact on federal and state budgets, and private spending; and identify reforms that will ensure slow cost growth while improving health.

Health care costs have been steadily rising for decades, but in the past few years there has been an apparent slowdown in spending. Is this due to the recession or other factors? Louise Sheiner, Federal Reserve Board, Amitabh Chandra, Harvard Kennedy School of Government, and Charles Roehrig, Altarum Institute discussed this phenomenon at length at the event and in a research paper entitled, “Perspectives on Health Care Spending Growth.” A few years of slower growth should be viewed as a turning point, particularly given that the recent slowdown occurred during unusual times: a decade of very slow economic growth and very low inflation. There is no telling if and when excess cost growth will slow. The Congressional Budget Office uses a convention that excess cost growth will slow to zero over the next 75 years, but that is not a projection. Technological innovation and a willingness to pay for that innovation has steadily risen, which has fueled rising healthcare costs, but at some point that willingness will no longer be as strong. That will be a turning point for the healthcare and insurance system.

Even with slowing health care spending in this country in recent years, the Federal government, state & local governments, and private sector employers all could face long term issues. In their paper, “Federal Health Spending and the Budget Outlook: Some Alternative Scenarios” Alan J. Auerbach, University of California, Berkeley, William G. Gale, The Brookings, and Benjamin H. Harris, The Brookings Institution discuss the potential long term effects of health care spending on the federal budget. Because of debt-GDP ratio not seen since World War 2, the future is already here in terms of a dire fiscal outlook. If health care spending does grow rapidly, there are a variety of potential fixes to the budget problem, involving a variety of potential tax increases and spending cuts. Health care reform needs to figure prominently in any fiscal solution.

In his discussion paper, “The Potential Impact of Alternative Health Care Spending Scenarios on Future State and Local Government Budgets,” Donald Boyd concludes state and local government healthcare expenditures could increase over 20 years by 1.2 percentage points of GDP under the baseline scenario, 0.3 percentage points under a low cost-growth scenario, and 2.3 percentage points under a high cost-growth scenario. While different states and local municipalities are subject to different problems and demographics, if the high-cost growth scenario is realized, there will be incredible difficulties for any elected officials to fund spending. A tax increase to fund this spending would raise state and local taxes as a percentage of GDP about 20 percent above the highest level that taxes have been in the last seven decades.

In his discussion paper, “Alternative Health Spending Scenarios: Implications for Employers and Working Households,” Paul Ginsburg, Brookings Institution said a key factor in how the private sector responds to higher or lower trends in spending is the behavioral response by those employers who provide health coverage or are considering doing so. Looser labor markets and greater pressure on employers to maximize profits may be factors leading to the potential of a more elastic response of employment-based coverage today than in the past

In their paper, “Improving Health While Reducing Cost Growth: What is Possible?” Mark McClellan, Brookings Institution and Alice M. Rivlin, Brookings Institution discuss what can be done to reduce health care expenditures long term. They cite reforming provider payment systems by moving away from rewarding volume of service toward rewarding measurable value, enhancing competition to increase consumer incentives to choose cost-effective treatments and providers and also to choose health plans that have more efficient payment and benefit design and finally, enhancing a culture of health by providing incentives for healthy behaviors and shifting the emphasis of providers and communities toward prevention and enabling healthy living.

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