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Home Publications Blogs Beat the Press Maybe We Shouldn't Thank the Recession for the Slowdown in Health Care Costs

Maybe We Shouldn't Thank the Recession for the Slowdown in Health Care Costs

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Tuesday, 05 August 2014 12:32

The Post's Wonkblog has a piece telling us that we should thank the recession for the slowdown in health care cost growth. I was one of those in the camp who thought the recession was responsible for the slowdown in health care growth in 2008-2010, however I think the explanation weakens as time goes on and costs continue to grow slowly.

The point is simple. Suppose that you have $10k slashed from your income in 2008 compared to its 2007 level. We might expect that you would spend less on health care and everything else in 2008. Suppose that your income in 2009 is again $10k below where you expected it would have been back in 2007. This happens again in 2010, 2011, 2012, 2013, and 2014. In other words, your income grows at more or less the same pace that you would have expected in each of these years, but the level in each year is 10k below what you had expected it would be in back in 2007.

In this story, which more or less captures the recovery, we might expect that the level of health care spending in these later years would be lower than had been projected in 2007, but the growth rate would be pretty much the same. The Post piece tells us that ain't so.

It cites two studies. Since one is behind a paywall, I will focus on the Brookings study which is freely available to the unwashed masses. This study finds a reasonably strong link between health care spending and GDP growth, however there is a long lag. The regressions for the growth of per capita health care spending use as independent variables current GDP growth and 5 lagged GDP terms using annual data. What is striking is that the strongest effect shows up on the fourth lagged term.

This is noteworthy in the current context because in 2013, the fourth lagged term gave us 2009 GDP growth, which was -2.8 percent. The fourth lagged term this year would give us 2010 GDP growth, which was 2.5 percent. The difference between these two implies a predicted rate of health care cost growth that is 1.6 percentage points higher in 2014 than in 2013. (This calculation uses the coefficients from column 1 of Table 1, the uptick in predicted cost growth would apply for all the regressions whose results are shown in the table, although the size would vary.)

The point is that if this study is the basis for expecting a sharp slowing of health care costs due to the weak economy, the period during which that would be true is over. Based on the study's findings we should be seeing substantially more rapid increases in health care costs in 2014 than we did last year. Thus far this doesn't appear to be the case, which may cause us to question the usefulness of this model for explaining recent patterns in health care cost growth.

 

Addendum:

Medgeek was good enough to send me the other study, a paper by David Dranove, Craig Garthwaite, and Christopher Ody, which I quickly read through. Looks to me like it provides good evidence that the recession was the major factor in reducing cost growth in 2008-2010. Their model shows that the recession would not lead to any further decline in cost growth in 2011 or later years (see Exhibit 3). In fact, the modest uptick in the employment to population ratio in subsequent years means that we should have been seeing somewhat above trend increases in health care costs in 2012-2014. So yes, there is good reason to believe that the recession was the major factor behind slower health care costs in the years 2008-2010. The continued slow growth over the last three and a half years requires another explanation.

 

Comments (8)Add Comment
paper
written by medgeek, August 05, 2014 2:19
"Since one is behind a paywall, I will focus on the Brookings study which is freely available to the unwashed masses."

LOL!

I'm sending the pdf of the Northwestern study.
ACA?
written by medgeek, August 05, 2014 3:37
"The continued slow growth over the last three and a half years requires another explanation."

Possible explanations:
--Gradual implementation of provisions of the Affordable Care Act?

--Drug companies/hospitals/health care providers voluntarily slowing increases in prices because they are under increasing scrutiny? (Sovaldi excepted!)

--etc?
...
written by urban legend, August 05, 2014 5:00
There should be a significant slowing down if not actual reduction of the administrative costs to providers associated with the uninsured. Now there will be a lot les s scrambling to find the best bucket for an insured patient who shows up at the door.

I recall seeing, but cannot find again, a Canadian commenter to a blog saying we would find this to be the biggest cost reducer in the bill. The closer we get to universality, the bigger that should be.
administrative costs
written by medgeek, August 05, 2014 5:30
The administrative costs of 'caid and 'care are on the order of 5% while private insurance is about 15% (these figures are from memory but I think they're close). I think urban legend is right--there's certainly money to be had by closing that gap
...
written by urban legend, August 05, 2014 5:32
Correction: for an uninsured patient who shows up at the door.
ACA Reduces Health Care Costs
written by Robert Salzberg, August 05, 2014 5:34
The medical loss ratio in the ACA has had a big effect on cutting down insurance costs. Since 2011, insurance companies that want to raise rates more than 10% must file for permission from HHS. Health insurance profit margins have shrunk.

The ACA has other cost control measures including reducing Medicare Advantage overpayments, fines for repeat Medicare admissions for certain conditions, and reduced payments for home health.

http://www.rwjf.org/content/da...rwjf414107
Increased Scrutiny
written by John Parks, August 05, 2014 8:03
I'll lean toward Medgeek's "increased scrutiny" as a primary inhibitor.
They med groups of various stripes know that they have a cash cow in hand and they will not give the anti-ACA factions any propaganda coups. They have plenty of time to fatten the cow before taking it to market.
I also suspect that they are even willing to take some losses now and for the next couple of election cycles to minimize the chances of ACA repeal.

They are more than willing to give away a few freebies until we are totally hooked. It's a basic business model and well proven.
Thinking too much
written by s ken brown, August 06, 2014 7:29
IMO there are too many variables meaning health care acts like a self organizing system. That said it's more the antithesis of the watched pot never boils. i.e. the watched pot never boils OVER.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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