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The $2.8 trillion question: Are health costs growing fast again?

H. Armstrong Roberts / Retrofile

A four-year slowdown in health spending growth could be coming to an end.

Americans' spending on health care spiked by 9.9 percent in the first quarter of 2014, new federal data shows. That data could be revised, or it could be a blip, but it adds to the evidence that health-care costs are back on the march — which is very, very bad news for the federal budget.


Separate research found that Americans used more medical care in 2013 as the economy recovered, new reports show – and that health spending is now growing just as quickly as it was prior to the recession.

"We're at the highest level of growth since the slowdown began," Paul Hughes-Cromwick, a senior health economist at the Altarum Institute, which tracks health spending. "You have to go back seven years to see growth like this."

More health spending can sometimes be a good thing: it might reflect more Americans gaining health insurance and seeking out needed medical care as the economy recovers.

But it also present challenges for the government. More than a quarter of the federal budget already goes towards health programs. That number could rise if health-care costs started growing faster than the rest of the economy again.

"If we cannot get health-care spending under control there's no hope for the federal budget," says William Gale, a senior fellow at the Brookings Institution. "The main hope, if we don't get health spending under control, is global warming gets us all before health-care spending gets us all."

The past four years have seen unusually slow health cost growth

For the last four years, health-care costs have grown at roughly the same rate as the rest of the economy. This is unusual; for decades now, medical spending growth outpaced pretty much every other sector of the economy. Health_cost_growth

The slowdown was a massive reason for federal budgeteers to celebrate. If health-care costs could just hold steady, growing at the exact same rate as everything else, that would free up federal dollars to spend on other things – anything from education to defense to the hundreds of things that the government buys.

New data shows health spending rising fast

Health care spending has grown faster in the past year, a trend that appears to be largely driven by Americans using more medical services.

The Altarum Institute in Ann Arbor, Mich. tracks health spending growth by month. It saw an uptick in late 2013 that has continued into preliminary numbers for 2014.


Separate data from the Bureau of Economic Analysis, which tracks the growth or consumer spending by quarter, shows something similar: health spending grew by 5.6 percent in the last quarter of 2013 and 9.9 percent in the first quarter of 2014, the fastest rates recorded in more than a decade.

We also know Americans started using more health care in 2013 than they did in the four years prior, thanks to two reports released in early April.

Doctor visits, increased by 2.7 percent in 2013 after four straight years of decline, according to a report from data firm IMS Health. Their report shows a rise in the use of nearly all medical services last year, after growth had flatlined for a few years.

Americans took more medications in 2013, too. The number of prescriptions filled rose by 3.8 percent after holding steady since 2009, according to pharmacy chain CVS Caremark.

"2013 was a rebound year for health care," says Murray Aiken, director of the IMS Institute. "We think that's a reflection of a stronger economy, more patients with insurance, and a relief of pent-up demand for some services that may have been delayed or deferred during the economic downturn."

The White House has used federal data to argue that the increase in spending is largely driven by Americans using more medical services, and not any spike in health care prices. Health care prices grew at an annual rate of 0.5 percent in the first quarter of 2014.

The big question: how much will health spending rebound?

Health economists have debated for years now whether the slowdown was cyclical — a product of Americans tamping down on spending during the recession — or more structural, reflecting a health care system that was getting better at cutting out waste.

Most have generally expected health spending to rebound a bit as the economy recovered and patients felt more comfortable spending on doctor trips. So they're watching to see whether spending bounces back to pre-recession levels or somewhere slightly lower.

"The fact that spending was so low for so long makes people think it won't come back all the way to where it was before," says David Cutler, a health economist at Harvard and former advisor to the Obama administration. "Most people think it will fall somewhere in between where it was before, and where it is now."

Even if a small portion of the health cost slowdown was structural – and latest decades to come – that could make a huge difference for overall health care spending. The Kaiser Family Foundation, for example, estimates that less than a quarter of the spending slowdown is attributable to permanent changes in the health care system. But if even that small fraction is permanent it would cut about a half-trillion in health care spending over the next decade.

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