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The Historic Spending Slowdown & the Consumer Paradox: New Study Explains Two Counter-Intuitive

July 23, 2014 | FAH Hospital Policy Blog

Category: FAH News, Publications, Spending Slowdown

A new report from the health care economics consulting firm Dobson|DaVanzo examines a critical question that has emerged despite the enduring national health care spending slowdown: Why do consumers continue to feel the pinch of higher health care costs at a time of record low growth in national health care spending and pricing?

The study, commissioned by the FAH, assesses the latest evidence of two breaking trends—the historic spending and price slowdown that continues to endure, as well as a paradigm shift in health care insurance coverage. Despite official statistics confirming the spending slowdown and mounting evidence that this trend is driven largely by a combination of structural factors, the study shows consumers are paradoxically experiencing a rising burden in terms of personal spending on their health care. The Dobson|DaVanzo analysis further examines how a paradigm shift in health plan benefit design is a major component of this “consumer paradox.”

The National Landscape: The Spending Slowdown Continues in 2014

This July, the Bureau of Economic Analysis (BEA) released its Q1 findings on consumer health care spending, which declined nationally by 1.4%. These findings mark the largest decrease in national health care spending in 30 years. This BEA data disproved earlier estimates of a large spending increase, and quelled claims by some who were quick to announce that the spending slowdown had ended.

The enduring slowdown is further supported by new evidence, including:

Medicare per beneficiary spending rates continue to decline so far in 2014, to -3.4%;

Hospital price growth continues its decade-long decline, with an annualized .9% increase in 2014 based on data to date.

These data points reaffirm the enduring nature of the spending slowdown in health care, driven in large part by structural changes occurring across the industry. “Hospitals continue to work diligently to increase the value of patient care, and are encouraged by the enduring spending slowdown,” said Charles N. Kahn III, President and CEO of the Federation of American Hospitals. “This slowdown has resulted in massive savings to Medicare and is accompanied by real moderation in health care pricing growth.”

And, an ongoing trend like this generates further Federal savings: CBO has continued to revise—and lower—its estimates of Medicare and Medicaid spending by well over $1 trillion since 2010. In March, Dobson|DaVanzo estimated that a sustained spending slowdown could yield an additional $900 billion in Medicare savings through 2024.

The Consumer Paradox: Why Are People Spending More of their Money on Health Care?

Despite the recent good news and statistics on national health care spending, the experience consumers perceive is quite the opposite. In recent surveys, 58% of Americans believed health care costs for the nation were growing faster than usual. The Federation commissioned this report to better understand the root of consumer sentiments and examine whether the perception of increasing personal health care spending was in fact the reality for consumers.

This consumer paradox was something Dobson | DaVanzo noted in their first examination of the spending slowdown in 2013.

“While the data show overall health care spending is slowing, consumers may well be struggling with their own reality of difficult out-of-pocket costs as they seek and receive the personalized health care they and their families need. To the degree individuals are feeling that pinch, it is important to note those costs are driven…more by decisions by employers and other payers to impose on those with coverage, higher out-of-pocket costs or premium sharing expenses.”

In their new study, Dobson|DaVanzo find benefit plan design has undergone a striking structural change of its own over the past few years. This change has created an environment in which health care coverage risks are shifting more to the consumer. Consumers are seeing this risk shift in plan design through a number of ways, which all lead to significantly higher out-of-pocket (OOP) and premium costs.

The change in benefit design has been swift and steady, touching the majority of employer-based coverage. According to the study, 77% of companies have increased cost-sharing through a combination of higher deductibles, co-payments, or premium contributions.

This change is occurring in tandem with a period of modest wage growth, which exacerbates the burden of the risk shift on consumers. Worker premium contributions have increased 114% from 2002-2013, while the average worker’s income has increased by 31%. In a span of just over 10 years, workers’ contributions to health care premiums have grown at almost 4 times the rate of their income.

“It is unfortunate that consumers with employer-paid coverage are experiencing significant increases in cost and premium sharing despite the fact that trends in price and cost growth continue to moderate,” Mr. Kahn added.

Much of the evidence from the study outlines significant changes in insurance coverage across a short time span:

* From 2006-2013, the average deductible for family coverage increased more than 75%, an increase of nearly $1,000.

* In that same span, the number of workers with high-deductible health insurance plans increased more than 5 times, from 4% to 26%, with the typical plan deductible totaling more than a family’s available savings.

* Out-of-pocket maximum limits are growing – half of families enrolled in plans have out-of-pocket limits exceeding $6000, a 32% increase from 2010 to 2013.

* Employees’ share of medical costs (premium + OOP) grew by 42%—from $6,824 in 2009 to $9,695 in 2014.

Clearly, the consumer experience in health care has run against the national spending slowdown trend, in what appears to be a growing dichotomy. Slow wage growth adds to the strain consumers experience from the risk shift associated with the changes in benefit plan design. When it comes to personal health care spending, the perception matches the reality for consumers, who are spending more for care.

Dobson | DaVanzo conclude:

“The consumer paradox, then, is the uneasy reconciliation of a historic slowdown in the growth of overall spending on health care—including the growth of health care as well as hospital prices—with the reality of stagnant wages, increasing worker contributions to premiums, high deductibles, and out-of-pocket maximum limits that exceed the average family’s savings.”

Policy & The Paradox: Implications for Policymakers

For reasons revealed by the Dobson|DaVanzo study, the consumer paradox is real. From the policy perspective, there are clear present and future benefits to consumers, payers and providers if we stay the course. The structural changes we are seeing as part of a transforming health care model have already succeeded in bending the cost curve well beyond expectations. As health care savings accrue over time through slower growth, the benefits we are experiencing at the national level will continue to reach consumers through slower premium growth and slower health care price growth (which is already at near-record lows).

“Truth be told, consumers, government programs and employers are all benefitting from the national spending slowdown,” Mr. Kahn said. “Policymakers should be wary of disturbing this with further action, and should encourage the health care marketplace to continue adapting, innovating and implementing the structural changes already underway.”

Further, the structural changes to the health care model that are driving this trend are creating an improved health care system for consumers in the process, and we are only in the early stages of this transformation. Therefore, it is imperative that policymakers protect the spending slowdown. Consumers are the ultimate beneficiaries of a more efficient, higher quality health care system.

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