Revised GDP Report Shows Health Care Spending Falling – What’s The Deal?

On Wednesday, the Bureau of Economic Analysis (BEA) released its third estimate for Q1 2014’s real GDP. Strikingly, BEA revised Q1 GDP down from a 1.0 percent retraction to a 2.9 percent retraction – a sharp reversal from Q4 of 2013 made all the more strange by steady job growth in the first half of 2014. BEA cited several factors contributing to the downturn, including a decrease in exports and inventory investment. But a slowdown in personal consumption expenditures (PCEs) also played a major role in the shrinkage – specifically, a significant reduction in personal health care spending.

BEA had previously estimated that increased health care consumption contributed to a 1.01 percent increase in Q1 GDP; in the latest revision, however, the agency estimates that it actually shaved 0.16 percent off of real GDP. That’s led to plentiful speculation by economists and health care experts as to the reason for the decline in quarterly health consumption, especially considering that approximately 10 million Americans gained insurance coverage during the Affordable Care Act’s first open enrollment period.

Some, including former White House Office of Management and Budget (OMB) director Peter Orszag, treated the news as a major sign that an unprecedented slowdown in health care spending over the last several years may be here to stay. “If I had stood up in 2009 and said I think in the beginning of 2014 total health care spending would be falling at 1.4 percent after adding people to the rolls and Medicare would alone be up 0.3 percent nominal and therefore also negative in real terms, I would have been dismissed as a quack,” he told The New Republic’s Danny Vinik in an interview.

Others believe it’s too soon to rule out a spike in health consumption in the coming months, since a sizeable portion of new ACA enrollees didn’t see their coverage kick in until April or May, which were not included in the Q1 GDP report. Orszag, however, told Vox’s Adrianna McIntyre that this group is such a small portion of the total insured population that it would have comparatively little effect on broader health spending trends.

Rather, Orszag believes the slowdown in spending can be attributed to the increasing popularity of high-deductible health plans (HDHPs) that push more costs and responsibility onto consumers and a shifting medical landscape that is pushing providers to reduce high-risk patients’ readmission rates by investing in coordinated care models that emphasize personalized care management. While these models come with high upfront costs, many providers believe they will pay off as payment systems evolve from a fee-for-service system to a bundled model. It will take years to tell whether or not he’s correct – but if he is, it’s a game-changer for U.S. health spending and the national debt.

By: Sy Mukherjee