Tags: healthcare | Obamacare | cost | slow

Obamacare Isn't What's Slowing Healthcare Costs

Friday, 18 July 2014 11:50 AM

By Megan McArdle

Healthcare cost growth is slowing, and the Congressional Budget Office expects this to continue. Is this good news?

To many people, that question may seem crazy. Every other week seems to bring another lurid graph showing that if you project out healthcare costs for the next 40 years, 100 percent of our income will be devoted to hip implants and cardiac stents. What's not to like about slower growth in a major expenditure?

Well, much depends on why it's slowing. If healthcare cost growth is slowing down because we're working a lot of inefficiency out of the system, then the slowdown is obviously a big win for everyone except healthcare providers and their shareholders. This explanation is a big favorite with the Barack Obama administration, which likes to credit the Affordable Care Act and related policies for the slowdown.

But healthcare cost growth might be slowing down for other reasons. Innovation might be slowing down, in which case we've got good news and bad news. The good news is that we'll be spending less on healthcare in the future. The bad news is that we won't be getting so much in the way of new treatments.

Or the slowdown in cost growth might reflect broader growth trends in the economy. In that case, I've mostly got bad news: Healthcare cost growth will be slower in the future. But so will economic growth. Healthcare spending will be lower in the future, but so will revenue, meaning that we'll be poorer — and we'll still have a problem with the budget deficit. So this is pretty much lose-lose.

Which of these three things is the case?

Well, I think we can be pretty sure that public policy is not making the system more efficient, for two reasons. First, the decline started in the middle of the last decade, and there's no plausible policy mechanism that would have caused cost growth to moderate just then. And second, the same broad trend shows up in pretty much every high-income country. No matter how smashing you think Obamacare was, it didn't stabilize healthcare spending in Switzerland.

It could be a matter of better practices in the industry. One piece of evidence for this: The cost growth seems to decline most steeply in English-speaking countries, which could reflect some sort of information dissemination.

And yet, I'm skeptical. Healthcare is not a competitive industry the way automobiles are. The British, Canadian and American systems do not much compete for patients; moreover, each is organized so differently that it's hard to imagine all of them implementing the same productivity-enhancing measures at the same time.

Industrial diffusion is simply inherently slower than the trends we seem to be seeing — it's not as if Toyota invents just-in-time production, and two weeks later, it's in every factory at General Motors. This has to be especially true in healthcare, where competitive pressures are limited and heavy government involvement makes major change into a ponderous process.

Technological decline seems more plausible, as a Brookings Institution paper shows. Basically, healthcare innovation is expensive, and for roughly the last decade, we've been doing less of it. As old innovations come off patent or are refined into cheaper and better versions, costs fall.

If you think healthcare innovation is all useless me-too drugs, you should be pleased that we're getting less of it. As it happens, I don't think that's the case, so while I'm pleased about the budget impact, I'm less pleased at the prospect of fewer new medical technologies. The good and the bad news is that the authors of that Brookings paper don't necessarily expect the experience of the last decade to be continued in the future — good, because "whee, new treatments!" And bad, because, well, money.

The most worrying possibility is that this reflects a broader slowdown in how fast everything can grow. Certainly, it's clear that the Great Recession caused a major slowdown in healthcare costs everywhere; if you graph the data from the Organization for Economic Cooperation and Development, there's a sharp, across-the-board inflection point in 2009.

Opponents of this theory argue that the slowdown also shows up in Medicare and Medicaid, and is therefore less likely to be driven by the economy. I'm not so sure. During economic downturns, states clamp down on Medicaid reimbursements, and seniors get more worried about the price of copays and supplemental insurance because they're at best imperfectly insulated from economic problems.

Over the long term, there's only one way to find out if this is great news, and that's to wait and see what happens — to our budgets and to our health. In the meantime, I'm afraid that the happiest stories also look the least likely to me.

Megan McArdle is a Bloomberg View columnist who writes on economics, business and public policy.

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Healthcare cost growth is slowing, and the Congressional Budget Office expects this to continue. Is this good news?
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Friday, 18 July 2014 11:50 AM
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