• What happened to US health spending circa 1980?

    The US health system has many puzzles. Here’s one: why did US spending relative to GDP diverge from that of other wealthy nations around 1980? Check it out in this graph by Aaron, which we’ve posted many times, including earlier today:

    We’ve pondered this and related 1980s trivia before and not come up with a good explanation. In the comments, Donna Kinney offers a new idea.

    The change in the 80′s was the introduction of third-party payment and low or no deductibles in early managed care plans. Prior to tgrowing market penetration, patients paid out of pocket for most services and were reimbursed by insurers. […] Third party payment in Medicare also started in the early 80′s, freeing Medicare beneficiaries from up-front spending and claims filing.

    Third-party payment decreased the out-of-pocket cost for patients, decreasing the percieved price of care and driving demand and utilization up. Third-party payment increased the operating cost of providers and payers because of the claims handling costs on both sides of the transaction and also because the payers had to add new procedures and programs design to control utilization growth. Those utilization control programs might have limited cost growth during the 90′s but they had also been responsible for some of the cost growth during the ’80s as both payers and providers added new administrative burden.

    It sounds intriguing, but it leads to some obvious questions:

    • What publications document the notion that we can hang the spending divergence on third-party payment?
    • Other nations have third-party payment. That being the case, why is the US pulling away?

    One possibility is that third-party payment is a necessary but not sufficient condition for such explosive spending growth. One also needs the third parties to have little to no ability to exert utilization control. When they can exert that control, spending growth diminishes. I’m tempted to point to the 1990s as evidence of this, but we know that’s as much a GDP growth story as a health care spending story.

    • I’m not buying that this is more than a small part of the explanation. If you look at cost sharing over the years, the patient share of expenses didn’t start to drop until the late 80s, and then it began a 5+ year slide that went into the 90s and the flattened curve.

      Also, the 80s by no means saw the “introduction” of third party payment to providers. HMOs had been around for quite a while, and while it is true that the non-staff models of managed care we are used to now really started to grow in the 80s, as late as 1988 over 70% of Americans were in traditional indemnity plans.

      Finally, I think this gets causation backwards: third party payment, along with the managed care techniques that came with it, were a response to out of control growth in health care costs! Perhaps managed care didn’t help, but it certainly didn’t start the problem.

      I don’t have sources right now, but I thought it was a culture change among providers and a new aggressive attitude towards finding new revenue streams. Didn’t pharma also really take off in the 80s?

    • There’s a paper out there, either by Newhouse or Cutler (i think maybe cutler in JEP), which suggests that costs soared everywhere in the 1980s due to improved technological possibilities. Yet, whereas most countries introduced some form of rationing, the US just allowed demand to be satisfied without much constraint.

    • Dole-Bayh which encouraged taking publically funded research private without limitations.

    • I dont know the appropriate resource to query, but while we can say total growth took off in US after 1980, if broken out by hospital or outpatient service sector (or other), country to country, might we get closer to where the nidus of expansion lies?

      If uniform across all domains, etiology would appear to be more upstream than at the patient or service level in discrete buckets.


    • Brad F, there was a series of posts here on that very point
      not too long ago. The upshot was that the area with the most growth was outpatient.

    • Jonathon
      Forgive if I am mistaken, but is the time frame similar, mainly pre/post 1980? I dont believe so, as I recall that was a series of posts attempting to explain a blip in that decade exclusively, not for the past thirty years (1980s). Again, I could be wrong.

    • The issue from 1980 is not hospital outpatient growth. Look at total hospital spending – which includes both inpatient and outpatient – as a share of total personal health care spending (from the CMS National Health Accounts). You will see that total hospital spending rises much more rapidly than personal health care (PHC) from 1965 through 1982 (from 39% to 47%). In 1982 the hospital share reaches a sharp peak, and then begins to decline steeply. The decline continues through about 2000 (to 35.5%) then rises a little through 2009 (to 36.3%). The rapid growth in outpatient in the 1980s and 1990s started from a very low base relative to total inpatient spending, and fell far short of offsetting the relative rate of decline in inpatient. You DO, however, see a sharp upturn in the share of physician and clinics out of PHC in the 1980s. This trend flattens from about 1990, followed by a sharp upturn in the share of drugs out of PHC in the mid to late 1990s – which flattens out from about 2005 forward. Sounds like whack-a mole to me.