Health Care Spending Growth: Can We Avoid Fiscal Armageddon?

Abstract

Both private and public payers have experienced a persistent rise in health care spending that has exceeded income growth. The issue now transcends the health care system because health care spending growth threatens the fiscal health of the nation. This paper examines the causes and consequences of health care spending growth. It notes that the determinants of spending growth may differ from the determinants of high spending at a point in time. Specifically, the evidence overwhelmingly suggests that the primary driver ofinflation-adjusted, per capita spending growth over the past decades (and thus premium growth) has been the diffusion of new medical technology. The paper argues that while new technology has provided significant clinical benefit, we can no longer afford the persistent gap between health spending and income growth. In simple terms, if the economy is growing 2%, we cannot afford persistent health care spending growth of 4%. Growth in public spending is particularly important. If not abated, high public spending will require either substantially higher taxes or debt, both of which could lead to fiscal Armageddon. Growth in private spending also threatens economic well-being by forcing more resources toward health care and away from other sectors. For example, since the cost of employer-based coverage is always borne by employees (directly or indirectly), salary increases and health care cost increases cannot continue on together. To avoid economic disaster, payers will be forced to have a greater resolve in the future. Specifically, because neither public nor private payers will be able to finance growing health care spending, the coming decade will likely experience significant changes in health care financing. Consumers may be asked to pay more out of pocket when they seek care and both public and private payers will put increasing pressure on payment rates. Furthermore, payment rates to providers are likely to rise more slowly than in the past, likely by less than inflation, and a new form of payment that bundles reimbursement across providers and services will be implemented. All stakeholders, particularly health care providers, will need to adapt to the pressure. Ideally, this will lead to more efficient care delivery that will require a partnership among major stakeholders to develop systems of managing population health in ways that promote affordable, high-quality outcomes.