Healthcare Reforms and Costs

If we accomplish nothing else in healthcare reform, it is fiscally necessary for us to reduce the rate of increase in healthcare costs. According to the CBO, neither the House nor Senate plan will accomplish that:

Here’s a blow to President Obama and Democrats pressing health care reform.

One of the main arguments made by the President and others for investing in health reform now is that it will save the federal government money in the long run by containing costs.

Turns out that may not be the case, according to Doug Elmendorf, director of the nonpartisan Congressional Budget Office.

Answering questions from Democrat Kent Conrad of North Dakota at a hearing of the Senate Budget Committee today, Elmendorf said CBO does not see health care cost savings in either of the partisan Democratic bills currently in Congress.

Quoting the testimony of the director of the CBO:

In the legislation that has been reported we do not see the sort of fundamental changes that would be necessary to reduce the trajectory of federal health spending by a significant amount. And on the contrary, the legislation significantly expands the federal responsibility for health care costs.


As we wrote in our letter to you and Senator Gregg, the creation of a new subsidy for health insurance, which is a critical part of expanding health insurance coverage in our judgement, would by itself increase the federal responsibility for health care that raises federal spending on health care. It raises the amount of activity that is growing at this unsustainable rate and to offset that there has to be very substantial reductions in other parts of the federal commitment to health care, either on the tax revenue side through changes in the tax exclusion or on the spending side through reforms in Medicare and Medicaid. Certainly reforms of that sort are included in some of the packages, and we are still analyzing the reforms in the House package. Legislation was only released as you know two days ago. But changes we have looked at so far do not represent the fundamental change on the order of magnitude that would be necessary to offset the direct increase in federal health costs from the insurance coverage proposals.

Barring strenuous efforts at cost reduction, something we’ve never accomplished successfully, following the enactment of either the House or Senate plan ceteris paribus I would expect the healthcare system to follow the same pattern it did after the enactment of Medicare more than 40 years ago.

First, there would be a period during which increased utilization would cause total healthcare costs to increase steadily. When Medicare was enacted this phase lasted six or seven years. My guess is that healthcare as a proportion of total GDP would rise from its current 15% to 20%. That phase would end once the increased patient load had been completely absorbed into the system, possibly in as little as two or three years. During this period providers would become accustomed to sharply increasing revenues.

After the completion of the first phase as increases in revenues stabilized, providers, accustomed to sharp increases, would begin to increase their rates in order to maintain the increasing revenues which in the prior phase had been induced by the increased utilization. When Medicare was enacted this phase, too, lasted six or seven years. During this period I would expect healthcare as a proportion of GDP to rise above 20%. That should certainly be enough to absorb the available capital. The economy would see little growth except in healthcare.

Following the Medicare example the reaction induced by the rapid increases would cause providers to temper their demands but the harm would already have been done. At that point we will have entered stage three during which inflation and cost of living adjustments are the primary drivers behind healthcare cost increases. Note that much of the increases will be due to increasing healthcare costs. A positive feedback condition will have been created.

5 comments… add one
  • In short Dave, you agree with most of the predicitons I made earlier:

    1. Reform wont cover as many people as claimed.
    2. Raise health care costs.
    3. Accelerate the growth rate of health care costs.
    4. Reduce economic growth.

    I’m dying to see Michael Reynolds chip in here and tell us how we will be able to buy France after we have this reform.

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