The U.S. finally bent the healthcare cost curve, one economist says

Technology drives down healthcare spending

"The first really big thing is that, actually, technology in medicine has made healthcare grow relatively less rapidly than was thought," Cutler said in a media briefing. "And that's really important because for the past, call it 30 or 40 years, the view of health economists has been that technology always led to increased spending over time."

These economists have argued that healthcare's digital transformation increase treatment capacity and, therefore, spending. That's especially in a fee-for-service environment that incentivizes more care even if the value of the technology's use is low.

However, healthcare technology has become more likely to save money over time, Cutler and Klarnet found. For example, the U.S. has benefited from medications that prevent acute events and from surgeries that can now be performed more cheaply with fewer complications.

Technological innovations account for over a fifth of the healthcare spending slowdown, according to the paper.

This deceleration in healthcare spending is likely to continue as the medical field uncovers new technological innovations, especially around AI. The paper stated that AI could reduce costs by replacing people with computer technology. After all, hospitals spend about 60% of their total expenses on labor, according to the American Hospital Association.

AI has yet to completely replace humans in healthcare; instead, it augments their work, making them more efficient. The technology especially has an opportunity to support administrative work and reduce its cost, which represents about a quarter of healthcare dollars, Cutler said.

In part due to AI, healthcare is also "getting pretty good at limiting care to those who really need it," Cutler added.

"That's the story with a lot of these expensive cancer drugs, which are not selling as widely as older expensive cancer drugs used to sell because we've limited who gets it," he continued. "So, to the extent that AI cuts the market size to those who really need it, that would be quite valuable."

What about the prices?

In an influential 2003 paper in Health Affairs, leading health economists declared, "It's the prices, stupid." In other words, the U.S. spends far more on healthcare than other wealthy countries, primarily because prices are higher, not because Americans use more care.

A follow-up analysis in 2019 by most of the same health economists found that prices remained the main driver of high healthcare spending, despite many changes, including the passage of the Affordable Care Act (ACA), the progression of value-based care and the widespread adoption of EHR systems.

Healthcare prices are still in the spotlight -- new price transparency requirements are in effect, site-neutral payment policies are gaining momentum and regulators are zeroing in on provider consolidation, to name a few initiatives seeking to lower prices in healthcare. However, Cutler and Klarnet found that prices are declining, contributing to slower overall healthcare spending.

Their study found that price reductions accounted for 24% of the decline in medical spending. Prices have generally fallen as reimbursement rates adjusted for productivity and cost changes over time, particularly for imaging services. Prescription drugs that went off patent significantly contributed to lower prices, too.

Demand for healthcare services has also become more responsive to price, Cutler explained. Trends including high-deductible health plans, accountable care organizations and prior authorizations have made healthcare stakeholders more sensitive to the cost of care.

Overall, Cutler said healthcare prices have increased at about the Consumer Price Index (CPI), a metric used by the U.S. Bureau of Labor Statistics to measure the average change in prices for medical goods and services. Prior to about 2000, prices rose 1-2% above CPI, he reported.

The only exception the study authors highlighted was upcoding. Upcoding actually offset the price reductions, and this occurred as providers figured out how to increase prices in line with inflation while reimbursement has decreased, Cutler explained.

Upcoding is especially relevant now as payers and providers increasingly leverage AI for coding and billing, as well as payment. Popular AI scribes have already been linked to changes in coding intensity, with the tools capturing more diagnoses for patients.

Can the U.S. continue the momentum?

In addition to technology advancements and price reductions, the U.S. bent the cost curve through decreased demand for care, trends in healthier living and long-run supply. And Cutler is confident the patterns identified in the study will continue.

"The health care market has matured, and with that maturation comes a reduction in the rate at which spending increases," he wrote in the study. "Technology is no longer as vital a driver of increased spending. In addition, payers are better at fostering demand and supply conditions that lead to lower spending growth."

Still, there is work to be done to bend the healthcare cost curve further, he said. After all, the U.S. continues to significantly outpace comparable countries in spending without the clinical and quality outcomes to show for it. Affordability also continues to plague Americans, who are paying more for healthcare than ever before.

The pace of technological change and the associated costs will be factors to watch as the U.S. continues to address spending, according to the study. More cost-saving technologies would make a substantial difference in healthcare spending, as would lower development costs of therapeutics.

While the decelerated rate of healthcare spending growth is likely to persist in the near term due to technological advancements and policy interventions, external factors such as new treatments, upcoding practices and market dynamics could disrupt this trend. Continued innovation, particularly in AI, and effective policy measures will be critical to maintaining or further bending the healthcare cost curve.

Jacqueline LaPointe is a graduate of Brandeis University and King's College London. She has been writing about healthcare finance and revenue cycle management since 2016.