Spillovers in Health Care Markets: Implications for Current Law Projections

This paper reviews theory and evidence on how changes in one health care sector (e.g., the private sector) may affect outcomes in other sectors (e.g., the public sector). Evidence suggests that these cross-sector “spillovers” may be substantial in both the shortand long-term. This has important implications for projections of future Medicare spending in the Trustees report: the spillovers observed in the past suggest that while some divergences in public and private spending trajectories may occur in the short-run, persistent, substantial, long-run divergences between sectors are unlikely. That said, the conclusions we can draw from the literature are limited. Evidence drawn from past years, when many policy changes were occurring, may not adequately capture what would occur in the future in a current-law setting. Furthermore, while the existing literature is clear about the existence of spillovers between markets in the short run, it fails to provide a narrow range of magnitudes to be used in projections. Moreover, the conclusions concerning spillovers in the long run are based on a smaller literature that examines spillover effects on infrastructure, which should affect long run spending, as opposed to being based on direct investigation of spillovers on spending over long periods of time. Lastly, most evidence focuses on the effects of HMO penetration on care in non-HMO markets or on the impact of public fee reductions on private markets, with limited evidence on broader spillovers. Despite these limitations, incorporating cross-market spillovers into projection models is likely to generate a more complete picture of future Medicare spending.