• Chart, Quote, Website of the Day

    The hat trick goes to Ezra Klein for posting a great graph (a version of which is below), saying something sensible about it (quoted below), and bringing to my attention the graph’s source: the Health Care Budget Deficit Calculator, produced by the Center for Economic and Policy Research. The following graph is just one of many users can produce in a few clicks with the calculator. It shows the effect on the U.S. budget deficit as percent of GDP of a continuation of baseline health care cost trends (yellow line) and of a change to health cost trends of high income OECD countries (blue line).

    hc costs

    As I and many other sensible observers of our health care system and its costs have said before, the health reforms that may pass this weekend won’t mark the end of our struggle with health care costs. At best they are just a beginning.

    About this, and the graph, Klein writes,

    Our long-term deficit is not a function of our current spending, which is manageable. It is a function of our expected spending growth, particularly in health care. With the system growing at 8 percent a year and GDP growing at 2 percent or 3 percent a year, there’s a real long-term problem there. But you can’t cut, or even tax, your way out of it. If you cut 5 percent from the system in one year, that cut disappears by the next year.

    The fundamental problem here is the ratio between GDP growth and spending growth. If the two are in line, we can keep up. If not, we can’t. The only solutions that will work in the long term will be those that either increase our rate of GDP growth or decrease our rate of spending growth. That’s why I like to say that after we pass health-care reform, we’re going to need to pass health-care reform. Unless you can bring the sector’s growth under control, there’s no way to get the deficit under control.

    But if you can bring our costs more in line with international norms, the deficit problem disappears entirely.

    The health care cost problem is the deficit problem. It makes no sense to argue for a focus on one without the other. Reasonable people can disagree about how to control health care costs but not whether health care cost control is the route to deficit control. But we can only disagree about any of this for so long. At some point we have to actually do something. Maybe, come Monday, we will have finally started to do so.

    • He does not say, but I assume this is before the current reform bill passes, making that assumption. This is interesting as I often hear folks on the right claiming that Europe’s systems are not sustainable. I have never seen any data for their claims, but I have never had any to refute theirs.

      OT- I sent the following question to Cowen (I read way too may econ blogs). Answer if you will sometime. Why do private insurers pay more for the same care than does Medicare? My specialty is an outlier, private insurers pay us about 300% more than Medicare, but most providers make 20-305 more. Does Medicare act as a floor, pushing up private insurer costs. Or, does Medicare need to pay higher fees to keep up with private insurers so that providers will see their patients? How could we tell which is driving which? Or is there a better explanation?


      • @steve – Take a look at my cost shifting posts. In fact, I’ll be doing another soon as there was a paper on the topic by some MedPAC staff in Health Affairs this week. The quick answer is that causality is and always will be in all things an hypothesis. One can hypothesize either that low public payment causes higher private payment or the opposite. However, once one has a hypothesis, one needs to find strong evidence in support of it for it to be sustained. There is strong, credible evidence that low public payment causes higher private payment, but no where near at the dollar-for-dollar level some would like you to believe. It is actually closer to 20 cents on the dollar, a relatively small cost shift.

        Meanwhile, there is descriptive support for the notion that high private pay leads to high cost and low Medicare margins. But that has not (and probably cannot) be validated with a strong study due to lack of exogenous variation (or a good exogenous instrument) for highly paid hospitals.

        Hence, this debate will not be settled conclusively, or certainly not today. The effects are too small and/or too hard to test empirically in a valid way. In addition, variations in market seem to matter so the truth in market A can be different than that of market B.

        If Cowen answers your question, let me know.