Are Rising Health Care Costs As Bad As We Think They Are?

When pundits claim that health care spending is out of control, what do they mean?

Does it mean that Massachusetts' outlawing of hospitals' excessive price increases is a good thing? That rolling back the Affordable Care Act will automatically usher in a new round of price gouging? That when the DMCB generates another medical co-pay, the DMCB spouse is right to wave a copy of the bill around and demand that the DMCB do something now to reform the U.S. health care system?

As the Disease Management Care Blog understands it, what the pundits, Massachusetts legislators, patient advocates and the DMCB spouse mean is that more and more of our nation's gross domestic product (GDP) is being spent on health care services.

That assumes we'd all be better off if the U.S. were spending its national treasure on stuff like manufacturing, technology, education and innovation. So, instead of committing just under 18% of our output on hospital care, physician services, nursing homes, medical devices and drugs, we'd all be better off if we spent it on the production of solar panels, Facebook, public school vouchers and iPhone apps.

That way we wouldn't be struggling with the prospect of another 1% gain on GDP (to 19%) and the looming possibility that we'll soon be spending a whopping fifth of our economy on health care.

But is the spending on health care really that bad?  As noted here, the DMCB pointed out that non-government-insured health care costs have been moderating for years.  What's more, recent year-to-year increases in health care spending in the U.S. are actually lower than much of the developed world.

And now there's one more reason to doubt the prevailing wisdom about rising health care costs. Charles Roehrig, Ani Turner, Paul Hughes-Cromwick and George Miller of the curiously name Altarum Institute point out that the normally rising and falling GDP associated with routine economic cycles can make steady health care costs look relatively worse or better than they appear.

To dampen the impact of a cyclic economy on the assessment of health care spending, the authors compared health spending to U.S. "potential GDP." Apparently, this obscure economic metric has been used by economists to portray what GDP would be if the economy were operating at full employment of the current population and without any idle production capacity.  This metric has the advantage of "smoothing out" many of the peaks and valleys of the normally measured GDP.

Using potential GDP as the comparative baseline, the authors found that health care spending growth gained less than 1% of the economy starting in July of 2005, well before the onset of the Great Recession of 2008. In other words, during that time, the health care industry grew pretty much at the same rate as the "potential" GDP. 

What's more, in June of 2009, health care cost growth gained an additional 1% of potential GDP, only to fall back below 1% again in May of 2011.  Most of the increases seemed to be accounted for by Medicare Part D spending; if that particular cost is backed out, excess growth would have been 1% or less throughout the measurement period.

The authors can only hypothesize on why health care costs didn't outstrip the U.S. economy. While it could be partially accounted for by the rising numbers of uninsured (who would have avoided going to hospitals or seeing doctors), the authors point out that other trends could have played a role: changing physician practice standards, increasing numbers of salaried physicians, market pressures pushing down on fee schedules, increases in patients' out-of-pocket expenses making them less likely to access the care system, new care models (including disease management?), the increasing use of generics, previously expensive drugs going off patent and the drop-off in the number of "blockbuster" pharmaceuticals.

This means when the economy bounces back and/or Obamacare results in more insured Americans, there is no guarantee that underlying health care inflation will return.