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The health cost slowdown looks like it's ending. That's not all bad news.


A five-year slowdown in American health spending growth looks to be coming to an end.

New federal projections show that health-care spending grew 5.5 percent in 2014 — the first year growth has topped 5 percent since 2007. The faster growth, Medicare forecasters say, is a product of three factors: Obamacare expanding coverage to millions more Americans, the population getting older, and the economy recovering.

Health spending will continue to grow faster than the economy for the next decade, Medicare actuaries say. They project that the share of the economy that goes toward health care will rise from 17.4 percent in 2013 to 19.6 percent in 2024.

More health spending is, in one way, a good thing: It reflects 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 toward 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 five years have seen unusually slow health cost growth

For the past five 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.

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 — and certain costly drugs hitting the market.

Medicare, which publishes the spending projections, estimates that 8.4 million Americans gained coverage in 2014. Obamacare expanded Medicare to cover millions more Americans last year, and spending there, for example, grew by 12 percent last year alone.

"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 Medicare actuaries also called out a handful of expensive prescription drugs, particularly hepatitis C treatments, that hit the market recently as another factor driving up costs. Drug costs grew 4.1 percent in 2014, after rising 2.3 percent in 2013.

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 adviser to the Obama administration. "Most people think it will fall somewhere in between where it was before and where it is now."

The Medicare forecasters agree. They project that over the next decade, yearly spending increases will average out to about 6 percent per year, compared with "an average annual growth of about 9 percent over the three decades prior to the recession."

That's happening, they write, "even during a period when the uninsured population is expected to decline by almost 18 million."

Even if a small portion of the health cost slowdown were structural, that will ultimately 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.