On A Short Enough Horizon Everything Is Flat

Writing in the Wall Street Journal J. D. Kleinke declares victory in controlling healthcare costs:

Contrary to the perennial doomsaying, the health-care system is—almost in spite of itself—getting better. A generation of breakthrough drugs for chronic disease, mental illness, HIV and cancer were developed in the 1980s and ’90s at great cost. Dozens of these drugs—like Zocor for heart disease or Zyprexa for schizophrenia—are now widely available, many in generic form. There are now countless electronic ways of telling patients about them. And health insurers are driven by their own evolving market disciplines to make sure patients start taking them and keep taking them in the cheapest available versions.

Combine all these new medicines, information channels and business compulsions with the slow, steady transfer of economic responsibility for health care—from corporate and government bureaucrats to consumers and their families—and suddenly health-care starts to look almost like an actual market.

and produces a handy graph illustrating the second derivative changes in the cost of healthcare (the change in the rate of increase). Indeed, the rate at which the cost of healthcare is increasing is lower than it was in 2003.

However, when you look at a longer time horizon, as the graph I’ve reproduced at the top of this post does, a different picture emerges. Mr. Kleinke’s explanation for the decline in the rate of increase is one of the triumph of technology. What I see is somewhat different.

Every so often Congress, like the groundhog, emerges from its troubled slumber, and engages in a spasm of panicked activity, hoping to bring healthcare costs under control. Such spasms took place in the early 1980s, the early 1990s, and we’ve just been through one. Mirabile dictu! Almost as if in reaction to the inevitable threats to take the healthcare system under federal control, the rate of increase subsides.

Mr. Kleinke’s interpretation is one of technology triumphant and he sees something resembling a market emerging in healthcare. I see a fear of regulation and a response that does not suggest market forces so much as the response of a cartel to the fear of losing its prerogatives.

If Mr. Kleinke is correct, we’ll know soon enough. If the increase in healthcare costs remains around the general rate of inflation over a protracted period, say, two or three years, we’ll know a basic change has occurred. If, on the other hand, they begin to increase again, we’ll know it’s business as usual.

I would ask Mr. Kleinke a question. If technological change is introducing market discipline into healthcare, why does that discipline never push the rate of increase below the general rate of inflation? Isn’t that what you’d expect in a market?

8 comments… add one
  • Icepick Link

    Unless you choose a point, as opposed to any span, your headline is incorrect. And I’m not certain a point by itself warrants talk of any kind of horizon. There’s a standard function used in analysis that is discontinuous on any open interval on the real number line, for example. (Map all rational numbers to zero. Map all irrational numbers to 1. Or if you really want to be cute, you can map all algebraic numbers to zero and all transcendental numbers to 1. Variations suggest themselves readily.)

  • steve Link

    Your answer is not complex enough. The underlying economy is also a factor. Health care seems to lag a bit, but it definitely responds. Track out where we have recessions, and you see costs drop. It is not the only factor, but it is one. Also, It is unclear why private insurance would be affected as much by most of what the govt does, as it is usually aimed at Medicare. Managed care in the 90s would be an exception I think.


  • Your answer is not complex enough.

    Oh, I quite agree. However, as a first order approximation it certainly beats Kleinke’s.

    Or yours. The economy was not in recession from 2003 to the present. If the underlying economy is the primary driver of the increase in the rate of increase in healthcare costs, shouldn’t it have risen until 2007 and then declined from 2007 to the present? That didn’t happen.

    I think it’s possible that the state of the underlying economy is one of the reasons that the Congress gets interested.

  • PD Shaw Link

    There is an elephant in the room in this part of the article:

    “Much of this change got off the ground around 2001 as managed care (i.e., the hated “HMOs”) gave way to a renewed era of unlimited consumer choice and access—for a price. Those with insurance were suddenly free again to choose whatever health care they wanted, but this time with their own money. Higher deductibles, new co-payments, Health Savings Accounts, “tiered” drug plans—these were all rolling out between 2000 and 2004, the same years that health-care inflation was starting to cool. ”

    In 2001, the rate of uninsured was about 37%, and by 2010 it was about 50%. Is that enough to curb the rate of increase in healthcare costs?

  • PD Shaw Link

    Strike what I just wrote. The uninsured rate has moved more mildly from 14% to 16% over that time frame. I misread the chart. Still, his argument about greater cost senstivity at end of HMOs would apply to people “choosing” no longer to have coverage at all.

  • In 2001, the rate of uninsured was about 37%, and by 2010 it was about 50%. Is that enough to curb the rate of increase in healthcare costs?

    If so, it should draw a tear of joy from Steve Verdon’s normally steely eye. It would imply that abolishing healthcare insurance altogether is the key to curbing the rate of increase (which I doubt).

  • PD Shaw Link

    What Kleinke seems to be arguing though is that when insurance stopped fully subsidizing more costly treatments, they are choosing second-best options that require less out-of-pocket. The same dynamic could be expected to be more prounced if insurance is lost altogether and its all out of pocket. The increasing number of people without insurance during this period could be expected to have to delay medical care and choose third-best options to save even more money.

    I think the main problem with my redirecting of Kleinke’s theory is that IIRC a vast amount of the healthcare expenses are for people over sixty, most likely covered by Medicare.

  • steve Link

    “Or yours. ”

    As I noted, it is not the only factor. The 90s dip was managed care.

    Query- Would the sudden rises then also be due to govt. policy?


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