OP-ED

It’s NOT the Economy, Stupid!

With the US economy dragging itself to its feet, the housing and stock markets crawling back, and the Republican presidential candidates (and their nationally syndicated Falstaff) doing everything imaginable to alienate most American women, President Obama has been having quite a run of good luck.  But there is one piece of good news clearly not welcome around the White House: new data showing that health care costs are stabilizing.

I know, I know – this is health care, costs are always out of control, and the sky is always falling.  What could I possibly be talking about?

I’m talking about the actual numbers.  The accompanying graphs reveal that health spending has actually been stabilizing for several years, and the system we all love to hate is finally re-entering the economy’s normal orbit after three decades of skyrocketing growth.

This of course is hardly a cause for celebration around the Obama Administration, for obvious political reasons.  Why else would economists from the same department tasked with implementing health reform choose to tell us that this long-awaited good news is actually – well – bad news.

Huh?  In both graphs below, newly released data through 2010 show that health spending over the past several years has been normalizing to the rate of overall inflation rather than outpacing it – or grossly outpacing it – as has been the case, nearly without interruption, since the 1970s.

It must be the recession! the government’s economists declare in their article accompanying the release of the numbers in the January issue of Health Affairs, an explanation dutifully repeated by the major media.  And of course it must be a travesty. Everything in health care is a travesty, after all – at least for the grim-faced technocracy addicted to health care’s myriad dysfunctions – and especially for those in an administration struggling to maintain political support for a plan branded for already insured voters as the “Affordable Care Act.”

Fortunately, the government number-crunchers are dead wrong, as is evident with only a cursory glance at their own data.

The graph on the left is based on numbers that economists from the Centers for Medicare and Medicaid Services published in Health Affairs. The graph shows the growth rate of annual national health expenditures trending down from 2007 to 2010, tracking perfectly spending declines during the Great Recession. To align this data with the conventional wisdom that health care costs are always out of control – and to assure us that only the recession could have interrupted health care’s otherwise perfect slow-motion economic disaster – the researchers also compress three prior decades of health care spending inflation into three single data points and label them as “1980, 1990 and 2000.”  That’s why we, not the editors of Health Affairs, added the vertical gray bar, to show where the scale on the x-axis changes.

Wait a minute! Doesn’t it seem odd that professionally competent economists writing for a responsible peer-reviewed journal would compress part of data on the x-axis of their main exhibit without readily noting it?  We thought so too; and so my research assistant spent 12 minutes downloading the government’s source data and breaking apart the actual numbers so we could look at the detailed trend. The result is the more complete graph on the right, derived from the same government database used in the published analysis – and yes, it tells an entirely different story.

Expanded to reveal what actually happened between 2000 and 2007, and we find that health spending has been cooling, slowly and steadily, since 2002. Oops! Turns out the recession has had nothing to do with a 10-year trend – one driven not by government inaction and then the recession and threat of “ObamaCare” – but by slow, steady, cumulative improvements in medical care and, as importantly, by the introduction of marketplace disciplines into the demand for and purchase of that medical care.

If the recession were actually relevant to these numbers and the demand for medical care were as elastic as for, say, autos or appliances, the trend line in both graphs would have fallen off a cliff in 2008 and 2009, along with the rest of consumer spending.  Rather, the numbers stabilized during the recession, as part of trend that began back in 2002.  I suppose the authors could have been even more reckless with their speculations, and argued with greater empiric precision that the perennial health care cost spiral finally stopped accelerating because of 9/11.

Better Medicine and Real Market Forces

What is really behind this economic normalization of health spending? What has occurred during the past decade, absent any government “overhauls” of the system? Three things (1) medicine has slowly, cumulatively been getting better; (2) insurers have been getting smarter about benefit design and consumer behavior; and (3) health care consumers have been watching their once blank-check insurance coverage morph into tough, cost-sharing plans – with economic consequences attached to every choice.

These numbers are not the result of an insurance pricing cabal falling apart, nor a collective pre-emptive reaction to the coming of “Obamacare,” nor the result of any grand “disruptive” strategy by health care executives and entrepreneurs thinking they are implementing last year’s business school twaddle.  This is health care simply self-correcting, slowly and tediously, nearly a decade after the failure of the great managed care experiment of the 1990s.  Contrary to the perennial doomsaying of the health care technocracy – and the whining of an older generation of physicians and hospital administrators hit by the recent intrusions of accountability and computerization – the health care system is, almost in spite of itself, getting better.  If the 1990s were all about micro-managing the supply-side of health care (e.g., insurers beating down on hospitals about lengths-of-stay), the 2000s have been all about macro-managing the demand side of the equation (e.g., insurers introducing large co-payments for expensive branded drugs when generics are available). And as proven in reverse by the other “war on drugs,” it is clear which strategy – managing supply versus managing demand – works better in a mostly free society.

Health care’s long, slow shift from supply to demand management was getting off the ground between 2000 and 2003 (cf. the graph on the right one more time) – as most of “managed care” was giving way to a renewed era of unlimited consumer choice and access – for an extra price.  Those with insurance were free again to choose whatever medical care they wanted, but this time using some of their own money. High-deductible health plans, Health Savings Accounts, “tiered” drug plans, new co-payments for just about everything – these were all hitting the marketplace the same years that health care inflation, as per the honest version of the numbers on the graph on the right, was starting to cool. So maybe, people discovered, going “out of network” really isn’t a matter of life-or-death, if it costs an extra $100.  Maybe the generic version of that drug might work just as well as the fancy new branded one advertised on TV.  Maybe a Physician’s Assistant in an urgent care clinic can diagnose a bad sinus infection for $25, a whole lot faster than an emergency room physician can for $1,250.

While health insurers scrambled to create new benefit designs to harness the power of these emerging consumer market disciplines, they were also running out of healthy new customers to sign up; and those they already covered were getting older and sicker.  Luckily, the insurers had all those new drugs at their disposal, many going generic, and some widely prescribed ones even going over-the-counter. Combine all these changes in the market in the early 2000s, and insurers finally started managing the bottom line by actually managing disease, not just money, the dominant strategy of faux managed care in the 1990s.

Because of the myriad moving parts in the health care system – in particular the pitifully belated introduction of computers, data, and informatics – we cannot disaggregate these factors to determine which of these factors have actually helped or hindered this economic normalization, and to what to degree.  But the aggregate impact is clear, and the normalization of health spending is indeed good news – notwithstanding a false explanation by government economists with a political agenda to find a black lining in any silver cloud crossing the health care landscape.

The only bad news is that this slow, steady correction over the past decade is too slow, not nearly deep enough, and does not address the real drivers of waste in health care: the juggernaut of administrative madness that is the employer-mediated, hyper-regulated, fragmented, localized health insurance colossus – the same wreck into which the Obama Administration wants to jam another 30 million people.

Most importantly, this trend a decade in the making contains our best bets for true health system reform. And if we really wanted to bend the health care cost curve in a more dramatic way, i.e., downward, and actually make insurance “affordable” – we would double down on all these bets. We would change the tax code so that people, not their employers, can fund their own tax-advantaged mix of health insurance and spending accounts. And we would allow them to purchase that insurance and fund those accounts in a national, competitive market, just like we do today with car insurance, with the typical plan design converging on one consumer dial: deductible vs. premium, with the rest going into a spending account.  Hand the average American family the $15,000 their employer is spending on their health care now, turn them loose with it in a truly reformed health insurance market, and watch what happens.

In very short order, the marketplace would finally break apart the health insurance colossus into the two very different things it has been trying for too long to be: insurance against serious medical problems, and a glorified group buying club for medical products and services.  This would amount to full liberation of the consumer market forces that are clearly starting to work, if only at the margins, in the byzantine health care mess we all love to hate.  Then we will see what happens to those health spending numbers.

With any luck at all, ten years from now we will have to futz with the y-axis on the graph, to illustrate the magnitude of the decline in overall health care spending.

J.D. Kleinke is a Resident Fellow of the American Enterprise Institute. He has been instrumental in the creation of four health care information organizations; served as a health care business columnist for the Wall Street Journal; advised both sides of the political aisle on pragmatic approaches to health policy and legislation; and authored three books about health care and medicine. His latest book is Catching Babies, a novel about the training of obstetrician/gynecologists.

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Aaron CatlinMGJeff GoldsmithMatthew HoltPeter1 Recent comment authors
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Aaron Catlin
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Aaron Catlin

Mr. Kleinke, In your recent post on The Health Care Blog, you made several inaccurate statements regarding the annual release of the National Health Expenditure (NHE) Accounts and the accompanying Health Affairs article, unfairly impugning the Centers for Medicare & Medicaid Services’ (CMS) Office of the Actuary (OACT) and questioning our independence, competence, and impartiality. The purpose of this note is to point out the three major inaccuracies in your post and to correct these misstatements for your readers. 1. Your assertion that the findings of the NHE are a “false explanation by government economists with a political agenda” is… Read more »

BobbyG
Guest

Pass the popcorn.

JD?

Paul Hughes-Cromwick
Guest

Take a look at our Health Sector Economic Indicators briefs which come out monthly and give a timely reading on health care spending, prices, employment and utilization. February is here: http://bit.ly/eJE3yV
March briefs come out this Thursday.
Comments welcome!

MG
Guest
MG

I am kind of mystified as to what “slow, steady, cumulative improvements in medical care” have been improving medical care to account for the slowdown in costs or evidence that supports American are leading healthier lives making smarter lifestyle choices since ’02.

Matthew Holt
Guest

Now it’s clear why JD joined the righties at AEI–they give him his own research assistant! No need to do the ugly calculations himself like he would if he was struggling away at say New America. Where do I sign up?

Jeff Goldsmith
Guest
Jeff Goldsmith

Actually Matthew, since, as you know, this is something I’ve been watching for years, it’s a lot more complex than JD indicates, and the narrative a lot less satisfying. The ideological foodfight above notwithstanding: A lot of the double digit growth came from two sectors of healthcare that were growing in the mid teens for most of the inflation fest that was the 70’s-90’s- imaging and pharma, together roughly one-fifth of health spending. Pharma is literally bleeding IP- losing patented, branded drugs far faster than it is replacing them. Branded drugs continue running off for another five years, at which… Read more »

Peter1
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Peter1

I like the graphs on health care spending but where are the graphs on health care costs and access? If spending has been transferred to patients and away from insurance why is this touted as a success. I’m also skeptical of JD’s “conclusions” that do not appear to come from on the ground investigation but ideological dot connecting from a graph. “I know full well that auto insurance is regulated at the state level, but that’s a tiny paperwork exercise: the core of the industry operates via national operations and marketing, and a dozen carriers sell highly standardized policies direct… Read more »

Barry Carol
Guest
Barry Carol

Nate – I’m sure you know a lot more about this than I do but here’s my take on employer provided health insurance whether it’s treated as taxable income to the employee or not. When a new employee joins and becomes eligible for health insurance either immediately or after a waiting period like three months, if he doesn’t sign up for coverage when it’s first offered, he will have to pass underwriting if he wants it later unless he can show that he had alternative coverage such as inclusion in his spouse’s plan. I also think an employer could only… Read more »

Barry Carol
Guest
Barry Carol

I agree with Nate’s comment that large self-funded health insurance plans have very low administrative costs. These ERISA plans are exempt from state insurance mandates, they own their reserves, and they take all the claims risk except to the extent that they choose to reinsure against very high claims either individually or in aggregate. That all said, I think we would be better off if the tax preference for employer provided health insurance were eliminated or at least phased out as part of tax reform that gets us to lower marginal income tax rates and a much broader tax base.… Read more »

Nate Ogden
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Nate Ogden

I lost the original post, anyways quick question, with lots less explanation, for those that favor eliminating the employer write off. When I do the math all they pay is FICA & FUDA, wages are still a write off. So they would pay 8% more then what they pay now. If the employee still keeps their section 125 favorded status though then the employer saves the FICA and & FUDA so you have accomplished nothing…. …except we know from experience if you give employees the cash millions will choose to pocket it and go without insurance. Any additional tax revenue… Read more »

John Ballard
Guest

@Bobby G I admire your tenacity, but dealing with Nate is an exercise in futility. He really doesn’t get it, so I make it my business to keep out of the threads any time I see the name (this time being an exception). I’ve noticed, however, that he is a diligent student and does a lot of studying. His resources are much better now than, say, a year or two ago, and he makes more good observations. I notice he even cited Enthoven a few days ago in another thread. Keep up the good work, but don’t waste a lot… Read more »

BobbyG
Guest

I hear ya, John, and, yeah, I know. In fairness, he has increasingly brought more substance to a lot of his comments lately, but his reflexive and juvie ad hominem attacks on everyone tend to nullify him.

But, it’s just a blog.

Nate Ogden
Guest
Nate Ogden

“short for argumentum ad hominem, is an attempt to negate the truth of a claim by pointing out a negative characteristic or belief of the person supporting it”

“his reflexive and juvie”

Thank you for using it in a sentenance their Bobby so we all had a clear example of what an ad hominem attack looks like:)

This would be another right?

“He really doesn’t get it,”

I think I am catching on to how civil debate is suppose to work. If your a liberal everything is fair game, Bill Maher. If your a conservative don’t you dare say something we disagree with, Rush.

BobbyG
Guest

“using it in a sentenance their Bobby”

No Further Questions, Your Honor.”

Marcelo Cardarelli MD
Guest

Great article showing that Spinning (by the right and the left) is the most practiced sport in DC.

Now, if everyone could just stop calling it “Healthcare costs” and start using the real name “Healthcare Prices”, it would be great.
No one knows what a cost of anything is, not the hospital administrator, not the doctors and allied personnel, of course not the patient, and particularly not the government.

Paul Hughes-Cromwick
Guest

CMS did what they do every year: Provide extra detail for recent years and add intervals between earlier, older years. Moreover, you imply that they attempted to deceive in the way they charted the data, yet no such chart appears in their article!

Please have a look at our blog responding to your Wall Street Journal op-ed, a similar version of this blog. http://healthpolicyforum.org/post/myth-runaway-health-spending-crisis-really-ending

Nate Ogden
Guest
Nate Ogden

“with no negative health consequences” How do we define this? I have hoped we reached a point in the discussion where we all know we need to accept some negative health consequences in order to afford a better system all around. Is a cancer patient dieing 3 months sooner becuase they were denied a $100,000 per month experimental treatment a negative health consequence? We all need to be more aware of how we speak to the public and the promises we make. Unlike Cleveland Clinic claims every life does not deserve world class care all the time. As long as… Read more »

steve
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steve

Way more than 4 million cannot afford health care insurance, unless you mean mini-med plans.

Steve

Nate Ogden
Guest
Nate Ogden

I have done the math on here numerous times Steve, only 2% of the population is uninsured becuase they can either not get accpeted or afford insurance.

The rest are uninsured by choice. There is a reason the media never explains the numbers to you.

BobbyG
Guest

Ahhh… gotta love Nate. “There are a few things I know very well, when someone that does not know those things well misspeaks why would I not correct them?” Your acerbic know-it-all partisan attitude tends to negate your asserted points. “What is his experience in designing, managing, and being accountable for health plans?” Can we verify yours? _________? http://www.chimss.org/downloadlibrary/doclibrary/Kleinke.pdf “…The principal goal of the consumer finance industry is to increase the number of transactions. By contrast, the principal goal of the health insurance industry is to slow down transactions or lose them altogether. Anyone who believes otherwise is ignorant of… Read more »

BobbyG
Guest

“incorrect facts” ???

Wait… I thought “facts” were, well, by definition “correct”?

Silly me.

Nate Ogden
Guest
Nate Ogden

BobbyG I should have made the statement more simple so you could grasp it. The Fed system that allows thousands of banks to operate efficentyly is not different then the EDI standards of healthcare, just a smaller data set. If Thousands of financial institutions can operate why do we need single payor or to reduce the number of plans?

Now can you keep up?

BobbyG
Guest

All you can do, in the end, is insult virtually everyone with whom you disagree.

At least I can count myself in good company on that point.

Nate Ogden
Guest
Nate Ogden

how was he insulted? Any time someone is corrected its an insult? You fail to make the distinction between people that I disagree with and people that make factual mistakes advancing their political cause. If you could ever carry a factually accurate conversation you would see the difference. I notice no one is discussing the HSA and FSA funding? Or the individual premium pre-tax. The three mistakes from a day or two ago were never disputed, I was just mean for pointing them out. Why is it so many simple facts that are easily found online are misrepresented here? And… Read more »

BobbyG
Guest

C-O-N-D-E-S-C-E-N-I-O-N

Look it up.

to recap

“your lack of experience”
___

I find that insulting to him and his work. It’s by now your well-documented M.O. here.

At least we can check out JD’s chops.

http://www.jdkonline.com/

Where’s your CV? List of publications? I love how you assume the self-appointed mantle of Mordant Correctionist-in-Chief here.

Nate Ogden
Guest
Nate Ogden

List of publications? That’s an interesting measure of one’s qualificaiton. If I actually do something for 20 years I am not qualified. If I write alot about something I have never done I am qualified? What is his experience in designing, managing, and being accountable for health plans? If he has never done those things how can he know what will and will not work? There are a few things I know very well, when someone that does not know those things well misspeaks why would I not correct them? Lets take for Example Ezra Klein and his HSAs are… Read more »

Nate Ogden
Guest
Nate Ogden

For example he says; “We would change the tax code so that people, not their employers, can fund their own tax-advantaged mix of health insurance and spending accounts.” between RR 61-146, simple cafteria plans, and existing HSA/FSA laws what tax code changes? All these options are already offered to the individual. When someone says we have to change the tax to allow something that is already allowed that makes me think they have other goals in mind. Why does Ezra really want to create more HSA regulation? To solve a sexism problem that doesn’t exist or something else? Does JD… Read more »

BobbyG
Guest

“your lack of experience”
___

THAT is simply priceless.

“How do we have thousands of banks all operating efficently as part of one system”
___

Do you even listen to yourself at all, ever?

F-E-D-E-R-A-L R-E-G-U-L-A-T-O-R-Y S-T-A-N-D-A-R-D-S

Moreover, are you arguing that one’s access to financial system commerce should be a function of his/her employment benefits?

Nate Ogden
Guest
Nate Ogden

“Moreover, are you arguing that one’s access to financial system commerce should be a function of his/her employment benefits?” Are you not aware that in millions of cases it already is? Credit Unions, based on employement. Is that your only means to have a bank account or access to financial services, no, its one of multiple ways individuals can gain access. Is employement the only way someone should be able to buy insurance? No its just one of multiple ways to get a policy. Just like 401K plans sponsored by employers are more efficent in regards to fees then individual… Read more »

BobbyG
Guest

I knew you’d take the bait.

J.D. Kleinke
Guest

I know full well that auto insurance is regulated at the state level, but that’s a tiny paperwork exercise: the core of the industry operates via national operations and marketing, and a dozen carriers sell highly standardized policies direct to consumers… and the resulting admin costs are miniscule compared to health insurers, whose actual operations are deeply embedded in local markets. And while ERISA plans do allow employers to escape state regulation, the actual nature of and related cost bloat for those plans goes in the other direction: it atomizes not to a coherent national system, but to 10,000 little… Read more »

Nate Ogden
Guest
Nate Ogden

You have never worked in inurance have you? “but that’s a tiny paperwork exercise: ” The insurers would disagree with you, how can you argue a no fault state is only tiny paperwork different then the other states? How are a no fault policy standard to those states that determine fault? “the resulting admin costs are miniscule compared to health insurers,” Health insurance averages over one claims per month per member, auto one every how many years? Could you come up with a more apple and orange comparison? “whose actual operations are deeply embedded in local markets.” Then why do… Read more »

Nate Ogden
Guest
Nate Ogden

“I know full well that auto insurance is regulated at the state level, but that’s a tiny paperwork exercise: the core of the industry operates via national operations and marketing, and a dozen carriers sell highly standardized policies direct to consumers…” State Farm has 40 million auto insured As of December 2008 State Farm had 67,000 employees and 17,000 agents. 17,000 agents doesn’t sound like national makreting. What does Anthem and United sell? I don’t see them having claim offices in every major city. Your just wrong JD, auto insurance is much more local then health insurance. Look how many… Read more »