Continued Slower Growth in U.S. Health Costs Reduces Federal Budget Deficit Estimates

February 13, 2013

Last week, the Congressional Budget Office (CBO) reduced its estimates of federal spending on Medicare and Medicaid as a result of a marked slowdown of the rise in health care costs during the last few years. This pattern of deceleration has brought the rise in health care costs to its lowest level in decades. The CBO projects that spending for these programs in 2020 will be roughly $200 billion, which is 15% less than the figure it projected three years ago.

The cause of the slowing rise in health spending remains in question among expert analysts. While the economic recession certainly contributed to the recent trend, many observers also see underlying changes in the health care delivery system as potential causes.

Many insurers have moved away from the fee-for-service payment system in which health care providers receive a fee for each service they provide. Instead, many payment arrangements are transitioning toward some form of capitation, in which health plans prospectively compensate a provider for all or a portion of the expected costs of a defined set of services for a patient for a period of time. In addition, insurers have also created financial incentives to reduce avoidable complications and hospitalizations. While many of these changes began to occur before the passage of the Affordable Care Act, or Obamacare, in 2010, the law created new policies and incentives to reinforce these trends.

Some signs suggest that these structural changes in the health care system contributed to the reduced growth in health spending. First, evidence suggests that the slowing trend began before the recession began to effect spending, and the reduced growth has continued despite the ongoing economic recovery. Health spending also did not appear to decelerate more sharply in states where the recession had more severe effects. Further, this flattening trend has occurred among spending for Medicare beneficiaries (rising 3% in 2012, the smallest increase since 2000), even though this group tends to be more insulated from economic fluctuations.

According to White House economists, reducing the annual rise in national health costs could increase economic output by 2% in 2020 and 8% in 2030. Moreover, it has the potential to increase workers’ wages and allow for other, more productive investments in the federal budget.

It remains unclear whether costs will continue to rise at slower rates. Even if the recent trend persists, health care costs will remain one of the largest pressures on the federal budget. Reductions in the benefits of large health programs may be needed to avoid tax increases, considerable budget cuts in other program areas, or larger deficits.

For a recent New York Times article about this topic:


Prepared by John Connolly (2/13/13)