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Decline in Cost of Health Care in America

A slower growth of health care cost would mean less burden on the individual family, freeing that family to invest in and live a higher quality of life. And for communities it would free billions of dollars for education, businesses, job creation, and future innovation.
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We have done it. We have decreased the increase in the cost of health care. Let us explain. For three decades (1980-2009), the cost of health care has been increasing each year at an average rate of 7.4 percent -- double the rate of inflation. [1] However, over the past three years, the increase in health care expenditure has remained at a low 3.1 percent. [2]

Is this decline the desperately-needed bend in the health care cost curve, or just the impact of the depressed economy?

Four leading studies point us in different directions. Last month's Kaiser Family Foundation study deduced that 77 percent of the decline was due to the economic downturn and is likely temporary. A report by Robert Wood Johnson Foundation echoed these conclusions.

In contrast, two articles in the May issue of Health Affairs point to structural changes such as "less rapid development of imaging technology and new pharmaceuticals, increased patient cost sharing, and greater provider efficiency" as major causes of the decline, suggesting that only 40-55 percent of the decline was due to the economic downturn.

The final answer is probably somewhere in between, with about half of the decrease realized by encouraging changes in the way health care is delivered and the other half due simply to the downturn in our economy. Regardless, it is important to recognize -- and celebrate -- that the cost curve has bent without collapsing our health care system or being prompted by draconian measures in rationing of health care. Moreover, the decline has not lead to deterioration in our quality measures. In fact they have improved.

Now, the $2.7 trillion question is, "How can we sustain this slower growth over the next decades?"

Undeniably, over the past several years the singular focus of conversation among policy makers has shifted from simply more care and better quality of care to better value in health care, where value is defined as quality over cost. The onset of value-based purchasing by Medicare and higher co-pays and deductibles for patients in employer-based plans has helped in disseminating this message to doctors and patients.

Yet if history is any indicator, as our economy strengthens costs of health care will rise once again. So, last month the Bipartisan Policy Center (BPC) made 50 bold recommendations on how to sustain the lower growth of health care costs. These recommendations are unique because they focus on improving the entire system of care over a prolonged period of time and break through the partisan rhetoric surrounding health care reform.

We want to highlight few of the recommendations that will impact providers -- hospitals and doctors. The BPC encourages advancing Accountable Care Organizations to a 2.0 version where the entire spectrum of patient's needs would be covered for a fixed payment and in doing so replace the irrational and outdated Sustainable Growth Rate (SGR) formula for physician reimbursement.

Additionally, the BPC policy paper suggests changing our present voluntary bundle payments program to the standard method of payments for certain DRGs. The impact of such a change in the payment system can be profound. When in the 1980s Medicare changed payments to hospitals by DRG, length of stay and hospital payments declined.

If such measures are not successful in restricting the cost of health care, then a fall back spending limit or a "cap" would take effect based on annual per beneficiary spending growth to a target of GDP.

To sustain these reductions in cost, the ready availability of current cost data and transparency of such data are essential. At present when patients get their bills, they do not know the difference between health care charges, expenditures and costs. To borrow an analogy from car sales: the sticker price, the new owner's price, and the dealer's invoice price, respectively.

As for providers, physicians are often unaware whether an antibiotic costs $150 or $15 when writing the prescription or a doctor's order in the hospital chart.

These costs have real impact for Americans. One Rand study found that if health care costs had risen at the slower rate equal to the Consumer Price Index, an average American family would have had an additional $5,400 more to spend each year on education, entertainment, food, and clothing over the past decade. But instead the average family has spent that money on health care. With our health care system at this crucial crossroads, we need to take this opportunity and stop the collateral damage.

A slower growth of health care cost would mean less burden on the individual family, freeing that family to invest in and live a higher quality of life. And for communities it would free billions of dollars for education, businesses, job creation, and future innovation.

The good news is that it can be done. And the blueprint for eliminating waste, lowering the cost, and maximizing the value is actively being considered by voices that rise above partisan bickering.

Manoj Jain is an infectious disease specialist and writes regularly for the Washington Post.

Bill Frist is a heart transplant surgeon and former United States Senate majority leader.


2. Centers for Medicare and Medicaid Services. National health expenditure accounts: historical national health expenditures by type of service and source of funds, CY 1960-2011 [Internet]. Baltimore (MD): CMS; 2012 Apr[cited 2013 Mar 3]. Available from:

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