“Excess” Healthcare Spending

There’s an interesting article from the Kaiser Family Foundation, something I alluded to yesterday, that I wanted to draw to you attention. Basically, the article is pushback against any idea that healthcare costs have been brought under any sort of control:

Health spending has been growing at historically low levels in recent years. The Office of the Actuary (OACT) in the Centers for Medicare and Medicaid Services reports that national health spending grew by 3.9% each year from 2009 to 2011, the lowest rate of growth since the federal government began keeping such statistics in 1960. Estimates from the Center for Sustainable Health Spending at the Altarum Institute suggest that the slowdown largely continued into 2012, with health spending growing by 4.3% last year. The Kaiser Family Foundation/Health Research & Educational Trust Employer Health Benefits Survey shows similar moderation, with premiums in employer-sponsored health plans increasing by 4% in 2012.

The article goes on to identify “excess” healthcare spending, the rate of healthcare spending increase less inflation and real GDP growth. I recommend that you read the whole article—it’s fairly terse.

The graph above is from the article and it illustrates those three components of healthcare spending increase, i.e. inflation, real GDP growth (measurements of underlying economic conditions), and “excess” growth.

I see a few deficiencies in their model. The most glaring is that they’re sharply underestimating the “excess” growth, particularly over the last ten years. In 1965 healthcare spending accounted for about 6% of the economy, a relatively negligible amount. Now it accounts for nearly 18% of the economy. A simple thought experiment should tell you that, if healthcare spending accounted for 100% of all economic activity, then any increase in healthcare spending could be attributed to the underlying economic conditions which is obviously nonsense. They should be comparing healthcare spending with non-healthcare inflation and real GDP growth rather than the general rates of inflation and GDP growth.

Another thing I’m not satisfied with is in this statement:

It is not surprising that inflation and GDP are significant drivers of health spending growth. Changes in real GDP – reflecting recessions and periods of economic growth – are primarily a function of changes in consumer spending, so it makes sense that consumers will also respond to broader economic changes by adjusting spending on health care as well. This could be a very direct response (e.g., that consumers use fewer health care services as their incomes lag and they cut back on spending of other goods and services as well). It could also be an indirect effect (e.g., employers cutting back on health benefits or fewer people working and more people uninsured during recessionary periods).

and this

Consumers may perceive health care as a necessity in a way that is different from other economic goods, and therefore cut back on health spending only after exhausting other ways of trimming household budgets.

I don’t think we can have much confidence in any statement about the consumer demand for healthcare because, in general, consumers don’t pay for the healthcare they consume directly. That may be the difference between healthcare and other economic goods. IMO the only statement about demand about which we can be reasonably confident is that it would be less in the absence of the massive subsidies, amounting to between 60% and 70% of all healthcare spending, provided by government at all levels.

Nonetheless, I think the article is worth reading.

One more thing to ponder as you consider the level of “excess” healthcare spending. There is no direct correlation between healthcare spending and any output of the healthcare sector, be it life expectancy, reported health of the population, hospital beds, or even procedures performed, e.g. heart transplants, medical examinations, etc. There is a correlation between healthcare spending and total sector wages.

Update

See also here. Note in particular the documentation of the three periods of healthcare spending growth I’ve mentioned from time to time here. From 1965 to 1983 “excess” healthcare spending was 3.1%. From 1983 to 1993 it was 3.5%. From 1993 to 2004, 1.6%. Since 2004, .8%. There’s also a nifty bar chart showing how the “excess” spending breaks down, e.g. hospitals, physicians, etc.

4 comments… add one
  • The Office of the Actuary (OACT) in the Centers for Medicare and Medicaid Services reports that national health spending grew by 3.9% each year from 2009 to 2011, the lowest rate of growth since the federal government began keeping such statistics in 1960. Estimates from the Center for Sustainable Health Spending at the Altarum Institute suggest that the slowdown largely continued into 2012, with health spending growing by 4.3% last year.

    Call me crazy, but going from 3.9% growth to 4.3% growth is a sign of accelerating growth.

  • steve Link

    Call me crazy but you need more than one number to claim acceleration.

    ” There is no direct correlation between healthcare spending and any output of the healthcare sector, be it life expectancy, reported health of the population, hospital beds, or even procedures performed, e.g. heart transplants, medical examinations, etc. ”

    There are a lot of studies showing better outcomes when more money is spent. There are a few studies looking at what happens when funding for something is cut. The evidence shows that having health insurance is associated with beter outcomes.

    Steve

  • Sorta off-topic, but related. My six-month old has hip dysplasia (misalignment of the hip). Up until a couple weeks ago, she wore something called a Pavlik Harness, which is supposed to set it right. We’ve been spending $170 (until we meet the deductible) each on these things, she went through three in six months (growing out of one and into another).

    Come to find out, whenever we’ve exchanged one for another as she’s grown, they’ve been just throwing the old one away. That dumbfounded me. These things cost $170 (okay, actually $120 after the insurance adjustment) and you’re not even trying to recycle them? Why the heck not?!

    So I’m preparing to do a post on this, and come to find out in the real world, the harness actually only costs $40-70.

    All of which strikes me as indicative of a disregard for cost. Why bother recycling or getting a good price on one of these things if insurance is picking it up anyway?

  • Call me crazy but you need more than one number to claim acceleration.

    I’ll call you a fool for not actually responding to what I wrote. I said it is a sign of accelerating growth.

    Further, even if we get “excess growth” reduced by half we still have high growth relative to GDP. And note that the estimated coefficients in their model for GDP are all positive, so the fact that the share due to GDP is declining in the out years also means that GDP growth is declining in the out years.

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