Healthcare Costs (Again)

(from Council of Economic Advisers Report)

I'm a real bear about healthcare costs. I read whatever I can find. You will find me blogging about this repeatedly. Why am I so obsessed? Quite simply: almost no one gets the full implications of what's happening. Here's a Tuesday New York Times article that talks about the cost slowdown and how it will lower ACA's total cost; but the explanation for the slowdown is primarily the impact of the recession, slowing down demand for medical services. And the article quotes a conservative source saying there is no cost slowdown, and talk of such is just another piece of the Administration's misinformation campaign.

So I was really happy when the Council of Economic Advisers put out the above report, doing a thorough presentation of the academic research on the healthcare cost slowdown, showing that one group (The Kaiser Family Foundation) argues that the recession is the primary cause; but other researchers have concluded that structural factors are at play, representing a possible seismic shift in how healthcare is delivered, moving from payment only for quantity of service, to more payment for quality delivered (see particularly CBO Working Paper, August, 2013).

Here's the key chart from the CEA report

In the post ACA period, 2010-2013, NHE has grown 1.3% per year, one third of the 3.9% growth rate for 2000-2007. Since real, per capital GDP grew from 1.5-2.0% during this period that means excess cost growth (the amount that cost growth exceeded GDP growth) was negative (a first time event) for overall NHE, and very negative for Medicare and Medicaid. Excess NHE cost growth is the central element in long term CBO budget/deficit/debt forecasting: in the 2010 Long Term Budget outlook this excess cost growth was set at 1.7%. In the most recent 2013 Long Term Budget Outlook, this was lowered to 1.5%. 

And the CBO is very aware that the cost slowdown is occurring and that for Government programs (Medicare, Medicaid), the slowdown is not related to the recession. Here's a very intelligent presentation that CBO Director Doug Elmendorf did in September of this year : "Is This Time Different? The Slowdown in Healthcare Spending". Elmendorf concludes that something structural is happening but that we cannot be sure it will continue; that the last time it happened (under Clinton, with the move to HMOs), the trend reversed (under Bush - 2000-20007); and that fee-for-service is still the main way the Medicare game is played, so odds are the excess cost inflation will return. Elmendorf did drop the forward forecast number for excess cost growth from 1.7% to 1.5%, which reduced future debt a lot, but still left it too high. Here's the key chart:

The reason Medicare/Medicaid spending moves from 4.6% of GDP currently to 5.9% in 2023, then to 8.0% in 2038 is excess cost growth. If this were held at 1% compared to the 1975-2011 average of 1.9%, our long term budget and debt situation would look reasonably solid. If excess cost growth stays at 0 or below, we can foresee a very sound deficit/debt picture long term, and we would need no further adjustments to entitlements, even accounting for the elderly demographic surge period we are now into.

How long will it take for the CBO to recognize this tidal shift and bring down future deficit and debt projections: 2-3 years is my guess. They've made big adjustments since 2010. By 2016, this cost slowdown will be a 9-10 year trend that will surely change the future expectations.

Did ACA do all of this? No, but it was a significant contributor. It provided for some very specific initiatives (i.e., penalties for hospital readmissions) and for an entire range of modular tests to see if the system could be moved from a quantity focus only(fee-for-service) to a quality focus primarily. Not one or two big specific, top down control mechanisms; rather a raft of small to medium-sized tests, that, if successful, could bubble up, and then be applied nationally.

This is working. Medicare is learning how to provide incentives and rewards for saving money, not just spending it willy-nilly, through different forms of coordinated and jointly accountable care. This plus Electronic Medical Records has kicked off a sea change in health care delivery that will be with us for many years.

This will be understood only gradually. Conservatives will fight it tooth and nail, because it means that Government can not only deliver health care to most people, it can also put in place new incentives that will have encouraged the entire health care system to shift focus and direction - and the model for all this will not have been command and control (the Right's view of any Government action); it will have been subtle adjustment in the incentive array, and working with the tremendous inertial energy of the system to invite a move towards a more efficient, quality-aware, wellness-nurturing system.

The number of degrees to which the GOP does not understand what changes the ACA will bring are too numerous to count.

All of this will be clear by 2016!

Amazing!!