Innovation Is What Explains Slower Rise in Health Care Spending

  • by: |
  • 06/17/2013
Avik Roy's recent post in Forbes ,  It's The Cost-Sharing, Stupid: Health Care Spending Is Slowing Because Americans Control More Of Their Health Dollars  argues that because people are paying more for health care premiums they are spending less on health care overall.   

Premiums -- which are largely tax free -- have been increasing.  But increasingly, Americans are paying LESS out of pocket for health care now than at anytime in recent history.  

Sara Kliff at the Washington Post ran the numbers and provides some good infographics that show this is the case:
Meanwhile,  in many European health systems out of pocket spending has increased.  But per capita health care spending in several OECD countries is increasing FASTER than it has in the US.  

It's hard to establish a direct cause and effect but are many indications that it is the decline in death rates, morbidity and rise in life expectancy that explains the slowdown.   And in turn,  the evidence that medical innovation -- a leading source of these health changes -- is responsible for much of the decline is stronger than it is for the traditional conservative claim that it's because of greater consumer control of dollars.  

Here's a thought experiment that underscores my claim:

Take any major disease and it's death rate and ask yourself what would make more difference in reducing the rate of health care spending over the past 30 years: health savings accounts or medical innovations that reduced death, disability and the reliance on expensive after the fact care such as hospitals and doctors.    Would HSAs make any difference if we were still treating HIV, cancer, heart disease with technologies available 30 years ago?    

Let's look at Medicare specifically.  Conservatives love to point out that Medicare Part D came in under budget because they think it advances the case for consumer directed healthcare.   In fact, one reason Part D came in under budget estimates is because millions of seniors don't sign up for it.   Does that mean they are spending less on new medicines?  Not at all.  Lots of seniors still get medicines paid for through retiree plans and Medicare supplemental plans.   And the shift to generic medicines which Part D likely accelerated has not been associated with large increases in utilization.   What is more likely at play here is the introduction, since 2003,  of treatments leading to better outcomes and well-being especially for people living with cancers, heart disease, stroke, diabetes, rheumatoid arthritis and even Alzheimer's.    Generics are great but the greatest benefit comes from new medicines.  

A paper by Victor Fuchs concluded that "the share of increases in life expectancy realized after age 65 was only about 20 percent at the beginning of the 20th century for the United States and 16 other countries at comparable stages of development; but that share was close to 80 percent by the dawn of the 21st century, and is almost certainly approaching 100 percent..."

These increases are twinned with gains in well-being, which of course translate into less consumption of the most expensive forms of  medical care.   

We have to rethink the role longevity and medical innovation plays in our economy and in health care spending in particular.   They are not viruses that need to be contained or problems that need to be managed.   And the key to future gains are not HSAs -- which I favor -- but the rapid development and adoption of medical innovations.  


Center for Medicine in the Public Interest is a nonprofit, non-partisan organization promoting innovative solutions that advance medical progress, reduce health disparities, extend life and make health care more affordable, preventive and patient-centered. CMPI also provides the public, policymakers and the media a reliable source of independent scientific analysis on issues ranging from personalized medicine, food and drug safety, health care reform and comparative effectiveness.

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