It really matters who the next president is. But there are other things that matter just as much to the nation’s future prosperity. One of them is: What is happening to health care costs?
If health care costs start to rise again the way they did before, then health care spending will swallow the economy and bankrupt the federal government. If they are contained, then suddenly there’s a lot more money for everything else, like schools, antipoverty efforts and wages.
The good news is that recently health care inflation has been at historic lows. As Jason Furman, the chairman of President Barack Obama’s Council of Economic Advisers, put it in a speech to the Hamilton Project last month, “Health care prices have grown at an annual rate of 1.6 percent since the Affordable Care Act was enacted in March 2010, the slowest rate for such a period in five decades, and those prices have grown at an even slower 1.1 percent rate over the 12 months ending in August 2015.”
As a result of the slowdown in health care inflation, the Congressional Budget Office keeps reducing its projections of the future cost of federal health programs like Medicare. As of October, projections for federal health care spending in the year 2020 were $175 billion lower than the projections made in August 2010. That would be a huge budget improvement.
The big question is whether these trends will continue. Many people believe that health care inflation came down for entirely temporary reasons and that over the long run we’re still doomed.
One group in this camp emphasizes that the economy went into the tank, so of course people went to the doctor less often. As history demonstrates, it can take up to six years for a recession’s impact to work its way through the system; then health care costs shoot up just as before.
Another group emphasizes that health care inflation is down because general inflation is down, and once general inflation is back to normal, health care costs will shoot upward.
A third group argues that we’ve recently had a decline in technological innovation. Not many useful but costly new drugs or machines have come on the market over the past few years, but if innovation resumes then so will rising costs.
But other experts say the reduction in health care inflation is partly structural and therefore more longstanding. Some point out that health care inflation really began trending downward in 2003 or 2004, during George W. Bush’s first term and long before the recession hit. Second, the reduction in health care cost growth seems to be global. Health cost growth has slowed in just about every high-income country since 2000, possibly as efficiencies are passed from place to place.
Members of the Obama administration like to argue that Obamacare has pushed things along. For example, the Affordable Care Act pushed providers into Accountable Care Organizations. Instead of getting paid for doing more tests and procedures, providers have a greater incentive to just keep people healthy.
The law also encouraged bundling. If you go in to get a hip replacement, the government makes a single payment for all services associated with that episode of care. The law also penalizes hospitals when patients have to be readmitted. There’s been a significant drop in readmissions.
There’s still a lot of uncertainty about which side of the debate is right. The most recent numbers have indicated a scary surge in health care prices, and some firms are projecting 6.5 percent inflation for 2016. While parts of the law reduce spending, other parts may lead to more spending, especially as the industry gets more concentrated.
And yet the weight of the evidence suggests that part of the change is permanent. Moving away from the bad old fee-for-service system has got to be a good thing. The greater pressures providers feel to reduce costs have got to be a good thing, at least fiscally.
Last March, Jonathan Rauch wrote a report for the Brookings Institution, arguing that the health care market is more open to normal business model innovation than ever before. The quality of health care data and analytics is improving exponentially. Pressures to reduce costs are ratcheting up. Profitable niches are growing for efficiency improving products.
In the past, most innovation involved improving quality of care at high cost. Rauch described many entrepreneurs who are providing innovations that maintain current quality of care but at lower cost.
We seem to be making at least some incremental progress toward a structural reduction in health care inflation. Many Americans are feeling gloomy about accomplishing anything these days, but progress is possible. We haven’t whipped health care inflation, or defeated our intractable budget issues. But the evidence suggests we’re landing a few serious blows.