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How A Bad Economy Affects Health Care Spending

Jan 18th, 2012

Health care spendingAs it turns out a struggling economy, can minimize health care spending. More people lose health insurance every time unemployment rises. People visit doctors less often; delay elective surgery; and cut down on prescription drugs. Those with health insurance coverage may also behave the same way, because they worry about their jobs, have pay cuts, or they just want to stay away from co-pays and out-of-pocket spending for deductibles, so, even government-sponsored plans like Medicare and Medicaid; and state-sponsored plans like Washington Basic Health and Healthy New York will be affected. This isn’t a calculated policy and almost nobody advocates it and may sound too crazy to be effective.

The government released figures to support this phenomenon last week. U.S. health spending increased by 3.9% in 2010, almost equal to the 3.8% increase in 2009. The two annual increases were the lowest in fifty years. This resulted in the stabilization of health spending as a share of GDP. In both years it was 17.9% of the GDP. This translated to $2.6 trillion in 2010 or about $8,400 for every American.

Medicare and Medicaid analysts attributed the decrease in health spending directly to the economic slowdown. The effect was felt a lot quicker compared to previous recessions according to them. One factor was the sudden drop in private health insurance coverage, by about 5.5%, from 2007 to 2010. Another reason cited was decreasing family income.

Here are some facts on government health spending:

  • Medicare and Medicaid led government health spending with about $1.164 trillion in 2010. This makes up 45% of the national health bill.
  • Household spending represents 28% of the total health bill which amounted to $726 billion, an all-time low. This includes co-payments, deductibles, insurance premiums, and other out-of-pocket costs.
  • The following are the three largest recipients of health spending: hospitals, $814 billion; doctors, $689 billion; and drug costs, $342 billion.

Larry Levitt, senior vice president for special projects at the Kaiser Family Foundation voiced skepticism that this trend will continue. “Once people feel more secure, they will use health services again,” he said.

However, some downward trends in spending might still prevail. According to market research firm IMS, doctors visit went down 4.2% in 2010. Maybe patients will see that some health needs can be resolved through phone calls or e-mails.

Expiration of drug patents and the shift towards cheaper generic medicine can be another source of lower health costs. This shift can translate to savings of up to 70% or even more. An estimated 8 to 12 percent of drugs will go off patent annually from 2011 to 2015.

Lastly, the Affordable Care Act, more popularly known as Obamacare, pushes some cuts in spending. As an example, it will force Medicare to cut down hospital reimbursement rates.

Three forces are seen to counteract this downward pressure: a recovering economy, which can relieve people of anxieties regarding elective spending; an aging society, which increases the demand for health care; and the kick off of Obamacare’s health care measures in 2014 which will add coverage to 30 million more people. Those with health care coverage use more health care compared to those without coverage.

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