The Real Reason Health Spending Has Slowed

NCPA February 12, 2014

President Obama tells us that "health care costs are growing at the slowest rate in 50 years." He and members of his administration attribute that trend to the Affordable Care Act. But ObamaCare is just taking effect this year, while the slowdown has been underway over a decade, say John C. Goodman, president and CEO, and the Kellye Wright Fellow in Health Care, and Peter Ferrara, a senior fellow, with the National Center for Policy Analysis.

Three developments track the slowdown in health care spending very closely: the growth of Health Savings Accounts (HSAs), the growth of Health Reimbursement Arrangements (HRAs) and the general trend toward higher deductibles. All three changes mean that patients are paying more medical bills out of their own pockets. And that has produced profound changes -- on both the demand and supply sides of the market.

Congress passed laws enabling HSA plans back in 2003, and participation has grown by double digits every year since.

• By early 2005, one million people were covered by high-deductible health plans that allowed individuals and their families to obtain Health Savings Accounts.
• In January 2010, 10 million people had access to an HSA.
• By the beginning of 2013, 15.5 million people were covered by HSA plans.

HRAs, a similar arrangement commonly offered by large employers, have grown in tandem with HSAs. Today, close to 30 million Americans are covered by these consumer-directed health plans.

HSAs give people the opportunity to manage some of their own health care dollars. As a result, they typically shop more carefully than when they are spending money that comes from a third-party payer.

• A 2012 Rand Corporation study found that people in HSA plans spend 21 percent less, on average, on health care in the first year.
• Total HSA costs have run about 25 percent less than costs for traditional health insurance.
• Annual cost increases for HSA/high-deductible plans have run more than 50 percent less than conventional health care coverage, sometimes with zero premium increases.

The emergence of so many people paying for care with their own money is also changing the supply side of the market, leading to walk-in clinics that post their prices and provide timely care, and places like Walmart that offer $4 generic drugs financed by cash, not costly insurance.

As HSAs and similar plans have soared in the private market, health-spending growth has plummeted. That reflects the success of market competition and incentives.

Source: John C. Goodman and Peter Ferrara, "The Real Reason Health Spending Has Slowed," National Center for Policy Analysis, February 12, 2014.