Healthcare Costs Register First Decline In 40 Years

Medical Costs Register First Decline Since 1970s

  by Eric Morath

U.S. consumers’ health-care costs fell in May for the first time in almost four decades, the latest evidence that government policies and an expansion in generic drugs are holding back prices.

The Labor Department’s price index for medical care — a figure that includes individuals’ outlays for insurance, medical supplies, doctor visits and hospital stays — fell a seasonally adjusted 0.1% in May. The leading driver of last month’s drop was a 0.6% contraction in prescription-drug costs.

The dip came as overall inflation across the economy remained moderate, rising a seasonally adjusted 0.1% during the month, a reflection of the slow recovery that has contained product prices and wages for years.

The latest turn in consumers’ medical costs, in figures released Tuesday, follows decades of steady gains in health-care costs from technological advances and increased use of health services. The last time medical costs posted a monthly decline, the patent on the modern MRI machine was a year old and the first test-tube baby was three years from being born. That was 1975.

Compared with a year earlier, the medical prices index increased 2.2%. That’s higher than the overall 1.4% gain in consumer prices but still the slowest annual expansion since the 1970s.

The Labor Department’s index only intends to measure consumers’ out-of-pocket costs, but as a huge buyer of medical care the government can influence prices more broadly.

The effects of the federal health care overhaul — the Affordable Care Act that passed in 2010 —and constrained government payments to doctors and hospitals seems to be trickling down to consumers, both those directly purchasing insurance plans and those buying drugs and treatments.

“The slowing of healthcare inflation right now seems to be driven by onset of new policies,” said Alec Phillips, a Goldman SachsGS -1.26% economist who follows health care trends. “That is probably going to be a temporary factor.”

In the coming year, the next phase of the health care overhaul will expand coverage and increase subsidy payments and could, in turn, push medical costs back up, Mr. Phillips said.

A PricewaterhouseCoopers report released Tuesday said a soon-to-be-implemented provision of the law that penalizes hospitals for expensive readmissions could help contain costs next year, supporting proponents’ views that the law will push down costs in the long run.

“The Affordable Care Act included numerous provisions to reduce health care costs while encouraging the delivery of high quality health care,” White Housespokeswoman Tara McGuinness said. “The law has already contributed to a dramatic slowdown in health care spending over the last three years. “

A number of other factors are aiding the slowdown.

Prescription prices are now down slightly from a year earlier, reflecting the latest stage in the industry cycle. Many patents are expiring and cheaper generic drugs are coming to market. Analysts expect that trend to reverse in coming years.

Meanwhile, employers are shifting the burden of health-care costs to workers. With consumers paying a greater share of costs out of their own pockets, they’re encouraged to shop for more affordable options, which puts pressure on providers to lower their costs.

“I think this is a longer-term trend,” said Randall Ellis, a professor of health-care economics at Boston University. “It appears that the reforms will stick and health-care exchanges and other policies will bring competitive pressure to markets.”

Over the past four decades, consumer medical costs have increased, on average, more than 6% annually. Improved technology, such as better drugs and medical imaging, drove much of the increases. The advancements drew more people to pursue care and expand the amount of treatment they receive. That increased demand helped drive up costs.

U.S. health care inflation started easing about a decade ago, then slowed sharply once the recession hit, reflecting a retrenchment of the broader economy. While medical costs started to pick up early in the recovery, they have eased further since the middle of last year.