Health costs are going down! So why are they not actually going down?

A recent report from the Robert Wood Johnson Foundation and Urban Institute shows that the United States as a whole is going to save $2.6 trillion from 2014 to 2019 in health spending! Except that health insurance premiums continue to go up every year, including predictions that 2017 premiums will increase significantly for those in health insurance exchanges. So what’s really going on? Why don’t we all see these savings?

We all know that health care spending in the US is extremely high, much higher than any other country. Wages have remained stagnant (when adjusted for inflation) over the last few decades, whereas an individual’s responsibility for health costs has increased dramatically over that same time frame, including up by 13% in the last year. Individuals’ contribution to deductibles alone for employer-sponsored health plans has increased 256% from 2004-14 while wages have increased about 32% (not inflation-adjusted) in that same time frame! This contributes to health care costs being the biggest cause of bankruptcy in the United States.

With this in mind, saving $2.6 trillion dollars is a huge deal! This is definitely a cause for celebration! That’s an average of about $8150 for every man, woman, and child in the United States! However, the true meaning of the $2.6 trillion dollar savings has to do with projected spending. When the Centers for Medicare and Medicaid Services (CMS) initially projected how much money would be spent on health care from 2014-2019, they over-predicted the amount.

So did they forget to carry the one in their calculations? Has something changed since the initial analysis that couldn’t have been foreseen? Are these savings in just one part of health care expenses and thus not applicable to all areas? Does it really mean any noticeable actual savings for each of us?

Unfortunately, savings in health care spending is not equally distributed. In this case, private insurers, Medicare, and Medicaid all save money, while various organizations, such as many hospitals, make more. This has to do with changes in how health care is paid for, and for financial rewards for those entities that improve the quality of health care provided. One major example is with hospitals that decrease the amount of patients who are readmitted within one month of a hospital discharge. Even if you don’t see any specific savings, the quality of care you get does improve the overall value of health care. The savings seen should theoretically trickle down to each of us in what we spend, but that is not always how such complicated industries work.

It is most likely that the main way any savings will manifest itself to each of us is through our premiums and out of pocket expenses not going up as much as they may have. This is unfortunate, because it is not something that we can recognize when it happens. Health care costs are growing, and will continue to grow, but in recent years the costs have not grown as quickly as they typically have in the past. It’s hard for nearly all of us to discern that as we may never know how certain events or perceptions may impact health care costs. Indeed, the slower growth over the last few years, largely driven by recovery from the recession, probably provides the biggest change in these adjusted projections. It’s therefore possible that we may have already “seen” much of these savings. It’s hard to appreciate when we are still spending more and more each year in proportion to inflation and the slow growth of our wages.

Proponents of the Affordable Care Act (ACA) will point to it as a major cause for the decrease in projections. Over 90% of the population has health insurance coverage, thus improving access to needed care and theoretically saving money long-term due to prevention and earlier treatment of conditions. While the ACA does play a role in this, it is unlikely to be a large driver of these savings. In fact, one large part that is believed to be contributing to the lower costs is that so many fewer people have been enrolled in Medicaid than the ACA envisioned due to many states electing not to expand the program. The projected numbers don’t actually take into account the indirect fiscal impact from those who remain without health coverage, such as untreated chronic conditions and loss of economic productivity.

With the dramatic shifts in health care consumers paying more for their care mentioned above, that may lead to less spending in general due to cost-shifting to individuals and households that simply cannot afford certain health care services. Could this even mean an increase in individual costs to some of us? This is pure speculation, but if many of us hold off on care of certain conditions due to an inability to afford it, long-term spending will go up. Also, with certain health care entities losing revenue, they are likely to charge more for some health care goods or services. This could indirectly raise costs through an increase in overhead, or cause direct rises in things such as certain procedures or durable medical equipment that we often pay for ourselves. Let’s certainly hope that this isn’t the case!

With the complicated system that we have, $2.6 trillion in “savings” won’t exactly result in $8150 extra money in our pockets. Most of the impact will come in lost revenue for many, and some benefit likely to insurance companies and government agencies. Any health care savings are a good thing, but for most of us, it’s unlikely to make a big difference in the short-term.

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