The Myth of Runaway Health Spending

February 22, 2012

The fraction of national wealth that is spent on the consumption of health care, and the rate of annual growth of this fraction, has given rise to the belief that extensive government involvement is necessary to contain this out-of-control spending.  However, strides made over the course of the last decade have created a downward pressure on health care spending that undermines this myth, says J.D. Kleinke, a resident fellow at the American Enterprise Institute.

  • Health care spending increased continuously since the 1970s, consistently outstripping inflation and economic growth.
  • This trend continued into the last decade, with the 7 percent rate of growth in 2000 rising to more than 9 percent by 2002.
  • However, this trend has since turned negative with the rate dropping almost every year since 2002, reaching a low of less than 4 percent in 2009.

It is crucial, in reviewing this trend, to note that the downward pressure existed long before the recession began -- this lends credence to the belief that the ingredients that drove down spending are independent from the economic situation as a whole.  Specifically, a number of developments in the early 2000s are largely responsible for the gradual reduction.

  • A number of expensive medicines that were developed in the 1980s and 1990s, such as drugs for mental illness, HIV, cancer, heart disease and schizophrenia, have since become generic and are much cheaper.
  • Greater information channels exist for communicating health care options and preventative measures.
  • Market forces have slowly permeated the health care industry with higher deductibles, new copayments, and Health Savings Accounts allowing participants to have a hand in controlling their own health care spending.

This final development especially took off between 2000 and 2004 -- the same period during which health care spending trends gradually reversed.  This is because the introduction of these options allowed market forces to play a greater role in the industry as consumers were given a greater number of choices.

Source: J.D. Kleinke, "The Myth of Runaway Health Spending," Wall Street Journal, February 17, 2012.

For text:

http://online.wsj.com/article/SB10001424052970204792404577227050656680024.html?mod=WSJ_Opinion_LEFTTopOpinion

 

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