Cost Curve Bends, But Not Enough

By John Hood

RALEIGH — When it comes to health-care inflation — a major burden for households and businesses as well as the primary driver of federal deficits — even glimmers of good news deserve notice, study, and perhaps celebration.

That’s why a recent working paper from Harvard University’s David Cutler and Lev Klarnet is getting so much attention. It found that as of 2024, medical spending in the U.S. as a share of gross domestic product was 15% lower than projected 14 years earlier, and indeed was only “marginally higher” than in 2010. Compared against the baseline, the gap was roughly $1 trillion.

Cutler and Klarnet concluded that “the United States has bent the health care cost curve,” and in response to the available data fair-minded observers would be obliged to agree.

“Since the advent of systematic data on medical spending in 1960,” the authors wrote, “no 14-year period has seen as slow growth of medical spending relative to GDP as was realized over the 2010–24 time period. Similarly, no period since 1970 has seen a lower growth rate of medical spending above GDP growth in the U.S. relative to other countries than that realized in the 2010–24 period.”

Does all this mean that the Affordable Care Act, signed into law by former President Barack Obama in early 2010, did, in fact, make health care more affordable? That’s a different claim, one that Cutler and Klarnet, being fair-minded themselves, examined with depth and care.

They and others have noted, for example, that health-care inflation actually began to slow down before the implementation of the ACA, with the likely date “some time between 2005 and 2010.” The first decade of the 21st century featured a wide range of sectoral changes and policy reforms, from industry consolidation and consumer-driven health care (higher cost-sharing by patients coupled with tax-free health savings accounts) to Medicare Advantage, Medicare drug coverage, and program changes within Medicaid and public-employee health plans.

Some parts of the Affordable Care Act accentuated these developments. Others worked against them. Consolidations — hospital systems getting bigger and absorbing physician practices, insurers owning benefits managers, and the like — were incentivized by the legislation with the goal of creating accountable care organizations (ACOs) to manage services more efficiently. In their analysis, Cutler and Klarnet estimate that higher cost-sharing, more prior authorization by insurers, and the proliferation of ACOs all contributed to the slowdown in health-care inflation — directly by at least 16% and indirectly by a larger amount.

Still, that leaves most of the bend in the cost curve as yet unattributed. Their preferred explanations include 1) improvements in lifestyle, such as less smoking and more exercise, especially among the elderly and those about to become so; 2) new therapies and technologies that save money over time by reducing surgeries and other expensive procedures; and 3) savings from popular drugs coming off patent protection and economies of scale in producing medical equipment.

Plenty of room for debate. Here’s what we can all agree on: while the cost curve did bend a bit, it wasn’t “as much as it could be or will need to be bent,” as Cutler and Klarnet put it. Even if health care expenditures grow at a comparably lower rate over the next 14 years, insurance premiums and out-of-pocket expenses will force households and business into difficult tradeoffs. Medicare and Medicaid will bedevil future presidents and congresses. Here in North Carolina, spending needs for Medicaid and the state employee health plan will dominate our own budget debates.

All of which is to say that whatever the net effect of the Affordable Care Act may have been, policymakers can’t afford to leave its cost-boosting features intact. They should equalize reimbursement rates for hospitals and non-hospital settings (so that further consolidations don’t jack up costs). They should enforce the new Medicaid work requirements and combat fraud more energetically. And in North Carolina, policymakers should promote transparency, competition, and innovation.

A modest bend won’t do. Let’s flatten the curve.

John Hood is a John Locke Foundation board member. His books Mountain Folk, Forest Folk, and Water Folk combine epic fantasy with American history (FolkloreCycle.com).