Health Cost Increases Down

Today’s Managing Health Care Costs Indicator is 1.39

The Wall Street Journal calls growth in health care expenditures “sluggish,” and the Boston Globe  and others  report on multiple hospital layoffs and threatened closings.  The head of the Mass Taxpayer’s Alliance pointed out that health care expenditure growth is way down in Massachusetts – and cautions against overly-aggressive new cost control measures that could threaten the state’s medical, biotech, and pharma segments.

Sounds like we should be declaring victory.

But not so fast. 

There is growing evidence that health care growth is tightly correlated with GDP growth.   As a country becomes richer, its health care costs go up.  In the US, the correlation is 1.39. This means that health care costs have increased exponentially by a factor of 10^1.39 consistently, whether health care costs increases appeared out of control or restrained.  

The corollary is that when a country stagnates, health care growth lags.  Further, when a country frankly loses wealth, health care spending can collapse.

Austin Frakt has pointed to new research showing the correlation between wealth changes and health care cost changes in the US.  Dylan Matthews, who blogs with Ezra Klein at the Washington Post, has posted a series of correlations for different countries   that show that the correlation between health care cost increases and increasing GDP (or aggregate national wealth) appears to hold everywhere it is studied.  Rates of health care cost increases vary – but the correlation does not.

What this means to me is that we should not assume that the current slowing of health care cost increases means that we’ve come up with the right approach to controlling health care costs.  When (if?) growth returns to the economy, we’ll likely see an uptick in health care cost inflation absent new efforts at health care cost containment.  Efforts to constrain health care cost increases are clearly swimming against a powerful economic current of tight association between GDP increase and health care cost increases. 

Frakt suggests we should focus our efforts on getting better quality or quantity of life from health care, since cost increases appear almost inexorable.

I believe we need to keep seeking approaches, whether they are in public health, provider payment, network contracting, or medical management, to be sure we’re purchasing better value in health care.  Perhaps I'm an optimist - but I think the correlation number might have been higher than 1.39 if there weren't so many impressive if imperfect efforts to 'bend the cost curve.'  We should also continue to seek cost savings when the economy is rocky, as demand for elective care is lower, and extra capacity can lead to lower unit prices.  The imperative to control health care inflation will increase when the economy is on the mend.

How Does Osama Bin Laden’s Death Affect Health Care Costs in the US?

Today’s Managing Health Care Costs Indicator is 9 ½ years

It’s been almost a decade since Osama Bin Laden and Al Qaeda set in motion the plane hijackings that killed over three thousand at the World Trade Center in New York, in the Pentagon in Virginia, and in a field in Pennsylvania.   We’ve been in two wars in the Middle East since the 9-11 tragedy, and we’ve invested billions in increased airport and other security.

And health care costs have kept rising, although they haven’t been rising quite as fast in the fast few years as they did earlier.

The past two days have been full of analysis of the impact of Osama’s death on terrorism, domestic politics, and on the price of oil.  I wanted to take a few paragraphs to muse about the potential impact of Osama’s death on health care costs in the US.

Of course, this is pure speculation, and the actual impact, if any, depends on many factors.

Osama’s death, and the waning influence of Al Qaeda, might lead to better security in the Middle East, which could cause lower oil prices.  This could make transportation less expensive, and could lower the cost of ingredients of some pharmaceuticals.  This will have virtually no impact on the cost of medical care –because transportation and ingredient costs represent such a small portion of total medical costs.  

When large natural disasters like hurricanes and earthquakes lead to big insurance losses, health care reinsurance prices soar. The converse is likely to be true, so as the risk of future terrorist attacks goes down, large reinsurance companies are likely to be very profitable.  Competition in this space will lead to decreased cost of reinsurance – which health insurers purchase to protect themselves from very high claims rates.  This could lower the cost of health insurance premiums, but only an iota.

The US is more likely to decrease its war effort in Afghanistan and continue its pullout from Iraq.  We have substantial medical resources in both countries (and in the nearby seas) – but the redirection of these resources stateside won’t have much impact at all on health care costs.  Aggregate costs could increase as some military physicians return to civilian life, where they have higher billing rates.   We’ll continue to face high costs of returning veterans with head and other severe trauma – and most of these costs will be borne in the Veteran’s Administration.

The two biggest open questions are whether this military success will give Obama  dramatically more political capital at home, and what impact it will have on the overall economic picture.

If this success in the war on terrorism gives Obama a substantial amount of political capital, more health care stakeholders decide to make plans assuming that the Affordable Care Act (ACA) will continue to be the law of the land.  States could push forward aggressively to complete their health insurance exchanges, and perhaps bills seeking to defund implementation of the ACA would languish in Congress.  We could see less objection to the Independent Payment Advisory Board, and some diminution of the arguments against comparative effectiveness research. 

It wouldn’t make any special sense, though, for this to happen.  George W. Bush tried to use his post-9/11 public support to convince Congress to privatize social security – and got little traction.  The Republicans and Democrats have genuinely different views of the cause of health care inflation, and the most effective approach to reform the system.  Osama’s death doesn’t change this.   I suspect that Obama will continue to face vigorous opposition, although it might be easier for him to keep wavering Democrats from straying and supporting repeal or substantial revision of the ACA.

I think the most important question to ask is whether Osama’s death will lead to higher growth rates and overall improvement in the US economy.  

If the US growth rate increases dramatically, unemployment eases, and consumer confidence returns, we’ll have less depression, fewer suicides, and be far better off.  Our health care costs, paradoxically, will increase as we are less sensitive to health care cost.   If, on the other hand, we have continued economic stagnation, it’s more likely we’ll take the tough steps to control the cost of health care.  Challenging economic times are when companies cut back on their insurance offerings, states try to pare back their Medicaid investment, and patients debate whether to get discretionary care.  Challenging economic times are also when new rules and regulations are most likely to force provider system change.

I think Osama’s death is likely to have a small positive effect on both Obama’s political capital (which could lead to more effective approaches to lower health care costs). It will also have a small positive effect on economic growth, which could hobble attempts to control health care spending.  My prediction is that these two factors will wash each other out, and Osama’s death will have little impact on US health care costs.

Government Capital Assistance to Physicians: Will it Increase Health Care Costs?

Here’s an interesting problem.  Kaiser Health News  this morning suggests that government loans to physicians will ultimately increase the costs of health care.   Physicians and other clinicians borrowed a total of $2.5 billion as part of the economic stimulus.  This is on top of $19 billion in government funds to help clinicians implement electronic medical records.

Physicians invested these borrowed funds in expansion, and probably did this in areas that have high margin (as would any other business!)

Examples cited:

è $1.5 million for MRI expansion in Florida

è $3.4 million for expansion of physician-owned orthopedic space in Kansas

è $3.9 million for cosmetic dermatology services in Texas

Will this increase the cost of health care?  Absolutely.

Did these loans to clinicians help get the economy moving?  Absolutely.

Here’s the paradox – health care is a major driver of the American economy.  It’s critical to lower the growth in health care, so that we can make investments in other portions of the economy (like education, energy conservation, and road repair).  But it’s awfully painful to make cuts in health care.  In our lackluster economy, health care has been the one portion of the economy that has been reliably growing!

Good News…. And Bad News

The Council of Economic Advisors released its report on jobs of the future yesterday. The good news is that the council expects robust growth of jobs in health care.

"Health care is forecasted to remain a large source of job growth in the labor market. The long-term trend toward more employment in health care is expected to continue, with many health care occupations, including medical records and health information technicians, registered nurses, clinical laboratory technicians, and physical therapists, expected to grow." Source

Sounds good. Ironically, the highest growth is expected in ambulatory services including home health care, where MedPAC has recommended large Medicare fee cuts.

The dark side of this forecast is that if there is robust growth in health care jobs – it means that we’ll keep on spending more on health care. This is consistent with the hospital and pharmaceutical agreements to save dollars over the next decade by lowering prices while expecting higher volume of compensated services. It’s not consistent with effective health care reform and universal access with lower overall costs.

Health Care Costs and Income Disparity

The McKinsey Global Institute recently published an analysis of the impact of health care costs on income disparity. (Registration Required) The study shows that only 11% of those with high income (over $130K) are not covered by employer health insurance, while this rises to 19% for high middle income ($58-130K), 43% for low middle income ($27-58K), and 78% with low income (<$27K). This does not include government-provided health insurance, such as Medicaid, for which only very low income individuals qualify.

Furthermore, employers pay twice as much for health insurance for their high income workers (top 10%) compared to their low income workers (bottom 30%). This means that high income individuals are more likely to have health insurance plans that provide robust coverage. Low income individuals, even if they have coverage, are more likely to have higher deductibles and coinsurance and copayments, while they are least likely to be able to afford these out of pocket payments. This is especially important since health care costs were reported to be a major cause of bankruptcy, even before the current “great recession.” (Comment on initial article)
























The McKinsey analysis reminds us that employer coverage of health care is almost universal for those with high incomes, and it is increasingly rare for those of low income. Furthermore, employers pay twice as much for health insurance for their high income workers (top 10%) compared to their low income workers (bottom 30%). This means that high income individuals are more likely to have health insurance plans that provide robust coverage. Low income individuals, even if they have coverage, are more likely to have higher deductibles and coinsurance and copayments, while they are least likely to be able to affort these out of pocket payments. This is especially important since health care costs were reported to be a major cause of bankruptcy, even before the current “great recession.”

See http://content.healthaffairs.org/cgi/content/abstract/hlthaff.w5.63
http://content.healthaffairs.org/cgi/content/full/25/2/w74