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Stopping the Spike in Health-Care Costs

Author: Peter R. Orszag, Adjunct Senior Fellow
May 5, 2014
Bloomberg.com

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During the past six months, spending on health care in the U.S. has accelerated substantially, new data on gross domestic product suggest. Naturally, that's led to some breathless commentary suggesting the era of low health-cost growth we've been enjoying for the past few years is over. In truth, the case for that conclusion is pretty weak. But that doesn't mean there's no cause at all for concern. We are missing a crucial opportunity to make sure that the recent slowdown never ends.

After growing less than 3 percent in 2011 and 2012, personal expenditures on health care jumped by 6 percent on an annualized basis in the fourth quarter of 2013, and then 10 percent in the first quarter of 2014.

In assessing these numbers, there are four things to keep in mind. First, as health-insurance coverage expands under the Affordable Care Act, some temporary increase in cost growth is to be expected. People get more health care when they're insured than when they're not. About 8 million people have signed up for coverage through the public exchanges created by the ACA, and another 5 million have enrolled in Medicaid. A reasonable estimate is that about half of these people were previously uninsured, so the insured population has risen by about 6 million, or 2 percent to 3 percent. If all of that increase were to occur within one quarter, and if the increase in costs were proportional to the increase in coverage, the annualized growth rate for that quarter would be in the range of 10 percent. Such an increase, though, would be a one-time event -- and would tell us little about the underlying utilization trend.

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