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Will health spending pop or not?

By Jay MacDonald ·
Tuesday, April 30, 2013
Posted: 6 am ET

It seems like common sense: When economic times get tough, people spend less on health care. When times improve, they spend more.

So the three main findings of a new report from the Kaiser Family Foundation should come as no huge surprise:

  • Health care spending grew by a mere 3.9 percent per year during the Great Recession, the slowest ever recorded since the government started keeping track in 1960.
  • The annual growth rate in 2001 through 2003, shortly before the crash, was 8.8 percent, nearly 5 points above the spending increases seen during the downturn.
  • Now that the worst of the recession has passed, analysts predict the annual growth in health care spending could rebound to more than 7 percent by 2019.

Recession not only reason for slowdown

The salient question is: How much of that drop-off in health spending was a temporary response to the state of the economy, and how much might reflect the under-the-hood tune-up to Medicare, Medicaid and health insurance by that unpopular mechanic, the Affordable Care Act?

The analysts at Kaiser attribute 77 percent of the reduced growth in health spending directly to the recession. That means that the remaining 23 percent flowed from changes made within the health care system that were at least partly in response to (or anticipation of) health care reform.

It's tempting to scoff at that system improvement, especially given that our health insurance providers and medical providers are surely well aware that the economy is rebounding and are likely to adjust their rates accordingly. In fact, that's exactly what happened following the economic downturn in the 1990s.

But Larry Levitt, vice president of special projects for KFF, says this time might be different. Unlike the 1990s, when an HMO (health maintenance organization)/managed health care experiment to curb medical inflation failed along with President Bill Clinton's health reform push, the Affordable Care Act is now the law of the land.

Savings might have staying power

As a result, if things work out as Levitt thinks they might, and that systemic slowdown in health spending sticks around, we could be staring at a permanent half-trillion dollar saving on the potential cost of health care in America.

"That's huge in a $3 trillion health care system, if we could shave a percent off health spending growth per year," he says.

However, keep in mind that there are still a few steep hills ahead to fully implement health care reform. Perhaps the biggest looms next year, when the law is expected to extend coverage to some 30 million uninsured Americans. Millions more will qualify for Medicaid, while others will purchase health insurance for the first time, many with the help of federal subsidies.

But with health care reform's "patient-centered" revolution, which bases payments to health care providers in part on the measurable benefits their patients receive, we now stand of chance of curbing health care inflation for good.

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Jay MacDonald is a Bankrate contributing editor and co-author of "Future Millionaires' Guidebook," an e-book by Bankrate editors and reporters.

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