Bending the Curve

The idea behind health care is that the rise in health care costs be mitigated. That is where the real problem is. If nothing is done and the trend continues (which it can’t but to illustrate why it can’t lets assume it does) health care spending by the government will eventually dominate the entire federal government budget. No other money will be available for national defense, highways, air traffic control, the courts or even Social Security. As for non-governmental health care it would become a huge portion of household expenditures. Obviously such a trend would not reach such a point. The current thinking is that if we don’t do something about it now, it will correct itself and that will be really, really painful. I don’t think too many disagree with this last point.

However, does the current health care reform do that? Does it reduce costs, or “bend the cost curve”? Here is Douglas Elmendorf, Director of the Congressional Budget Office,

Democrat Kent Conrad of North Dakota: Dr. Elmendorf, I am going to really put you on the spot because we are in the middle of this health care debate, but it is critically important that we get this right. Everyone has said, virtually everyone, that bending the cost curve over time is critically important and one of the key goals of this entire effort. From what you have seen from the products of the committees that have reported, do you see a successful effort being mounted to bend the long-term cost curve?

Elmendorf: No, Mr. Chairman. In the legislation that has been reported we do not see the sort of fundamental changes that would be necessary to reduce the trajectory of federal health spending by a significant amount. And on the contrary, the legislation significantly expands the federal responsibility for health care costs.

Conrad: So the cost curve in your judgement is being bent, but it is being bent the wrong way. Is that correct?

Elmendorf: The way I would put it is that the curve is being raised, so there is a justifiable focus on growth rates because of course it is the compounding of growth rates faster than the economy that leads to these unsustainable paths. But it is very hard to look out over a very long term and say very accurate things about growth rates. So most health experts that we talk with focus particularly on what is happening over the next 10 or 20 years, still a pretty long time period for projections, but focus on the next 10 or 20 years and look at whether efforts are being made that are bringing costs down or pushing costs up over that period.

As we wrote in our letter to you and Senator Gregg, the creation of a new subsidy for health insurance, which is a critical part of expanding health insurance coverage in our judgement, would by itself increase the federal responsibility for health care that raises federal spending on health care. It raises the amount of activity that is growing at this unsustainable rate and to offset that there has to be very substantial reductions in other parts of the federal commitment to health care, either on the tax revenue side through changes in the tax exclusion or on the spending side through reforms in Medicare and Medicaid. Certainly reforms of that sort are included in some of the packages, and we are still analyzing the reforms in the House package. Legislation was only released as you know two days ago. But changes we have looked at so far do not represent the fundamental change on the order of magnitude that would be necessary to offset the direct increase in federal health costs from the insurance coverage proposals.

In other words, the most likely result of the current health care reform bills are utter failure. Not only will it not bend the cost curve down, but it will bend them upwards. Precisely the opposite of what was supposed to happen.

Now it could be the Elmendorf and the CBO are wrong. That they are overly pessimistic about the few things designed to reduce the trajectory of health care costs, and that they are over estimating the upward impact of those things that will increase the federal commitment to health care. However, I doubt it. I doubt it for one simply reason: when you subsidize something you tend to get more of it. If you subsidize the consumption of health care people will consume more health care. And as the consumption rise, the demand for the inputs to health care will rise as well and thus result in higher prices and costs.

My guess is this health care reform will raise health care costs, will accelerate the growth of health care costs, will not cover nearly as many people as predicted, and will slow economic growth as taxes go up, and more and more resources are diverted into health care. All at a time when we need to be doing precisely the opposite.

Update: Dave Schuler has a post noting the same quotes by Elmendorf and has the following comments,

Barring strenuous efforts at cost reduction, something we’ve never accomplished successfully, following the enactment of either the House or Senate plan ceteris paribus I would expect the healthcare system to follow the same pattern it did after the enactment of Medicare more than 40 years ago.

His conclusions mirror my own. Higher costs, a greater growth rate in costs, and lower economic growth overall (save for health care). In short, the health care reform would be an utter failure.

Image by flickr user Martin Barber, used under the Creative Commons License.

FILED UNDER: Economics and Business, Government, Health, US Politics, , ,
Steve Verdon
About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research. He joined the staff at OTB in November 2004.

Comments

  1. odograph says:
  2. Grewgills says:

    Not only will it not bend the cost curve down, but it will bend them upwards.

    I read Mr. Elmendorf as saying that the curve would be shifted (raised) mostly in so far as government expenditures go. Aren’t shifting the curve up and bending the curve two different things?
    Neither mitigates the cost problem, but they are not the same.

    If we accept the goal that universal care will happen, how do you propose we get there? or is there no way there from here?

  3. odograph says:

    If we accept the goal that universal care will happen, how do you propose we get there? or is there no way there from here?

    Last night’s news was that California’s budget process had stalled again. That might be a sad example of “you can’t get there from here.”

    We are told that if something can’t go on forever, it will stop … but not always quickly.

  4. Dave Schuler says:

    I can’t speak for Steve, Grewgills, but my preference would be to take a series of pretty commonsense measures aimed at reducing cost as a prerequisite for universal coverage. Among the measures I would favor are means testing Medicare, limiting the deductibility of employer-provided healthcare insurance (I’d rather tax total compensation), revising the formula by which we subsidize medical education to favor primary care physicians, abolishing CON’s, just to name a few.

    In my view getting our fiscal house in order is something we must do; things we might like to do, e.g. universal coverage, are dependent on the things we must do.

  5. just me says:

    In my view getting our fiscal house in order is something we must do; things we might like to do, e.g. universal coverage, are dependent on the things we must do.

    I think this is a good point. I think part of the problem is that some people want universal or some form of government guaranteed healthcare now at any cost or any price-they want it because they like it, not necessarily because it will fix any current problems with the system or in the end save any money.

    Personally i would rather take small steps-do something about obvious problems (there is much in Medicare that needs fixing and the VA system is a mess). I would really love to see how we educate doctors change-and I think government incentive to encourage primary care training and/or serving in areas of need are a good goal-no matter what our healthcare system eventually looks like.

  6. floyd says:

    Thanks Steve, good article.
    Fact is, Democrat “health care reform” is going to work just as intended! Problem is, the intentions have little to do with health care.

  7. Dave Schuler says:

    You’ve brought up a good point, just me. Something between 30 million and 90 million Americans live in “underserved” communities. Giving them insurance doesn’t give them access to healthcare.

  8. Steve Verdon says:

    I read Mr. Elmendorf as saying that the curve would be shifted (raised) mostly in so far as government expenditures go. Aren’t shifting the curve up and bending the curve two different things?
    Neither mitigates the cost problem, but they are not the same.

    Okay, to get our terminology straight…

    Shift, a parallel movement (up or down) in the relevant curve.

    Bend, a change in the slope of the relevant curve.

    For there to be a shift we’d need a one time increase or decrease. I doubt this legislation would result in a one time change in the federal government’s expenditures. It would likely be a change over a number of years that would start small and accelerate over time. Now maybe Elmendorf meant just a shift, but I think the bend is more reasonable. But yes, he may have meant just a shift.

    If we accept the goal that universal care will happen, how do you propose we get there? or is there no way there from here?

    If by universal you mean coverage in the mid to high 90 percent range it maybe doable, but there are a few things to bear in mind.

    1. Most countries (even places like France) have unsustainable growth rates for costs.

    2. Most countries spend quite a bit (e.g. France spends about 11% of GDP while we spend 16% of GDP).

    3. Countries that have systems that are primarily government run have pretty substantial rationing via non-price mechanisms.

    4. Places like France, the Netherlands and Singapore have systems that rely more on the price mechanism, cost sharing, and mandatory savings to help keep things on a more reasonable basis.

    Bottomline is that the price mechanism in all likelihood should be a serious component in any health care reform. Not having one will mean that health care resources will be allocated by some other means…political means. Keep that in mind the next time it looks like someone like George W. Bush is heading to the White House. Do you really want him (or his appointees) making decisions about your health care?

    I still like Arnold Kling’s idea. We tax total compensation, the government provides a tax credit and people are allowed to shop for health care. That is the high level view. One problem area would be people with pre-existing conditions, but that might be addressed via the tax credit. Oh, and you’d have to buy health insurance or we toss your ass in jail, and like Singapore cane it too.

    No free riding off the system, try it and you get hurt bad, both physically (imprisonment) and financially (substantial fines, fees, penalties, etc.). If its a choice between something like shelter or health care…well at least you’ll have health care while you are homeless.

  9. Dave Schuler says:

    well at least you’ll have health care while you are homeless.

    Not exactly. As I pointed out above there are lots of “underserved communities”. That’s an extremely difficult nut to crack.

    I have my own views. For example, I’d like to see more reliance on automation and telemedicine.

    BTW, I’m okay with the plan Steve outlines. I don’t think it does enough about the supply bottleneck but, then, neither does any other plan on the table.

  10. Tlaloc says:

    So despite being the wealthiest nation on earth we’re just too dumb to figure out the system every other OECD country makes work?

    I find that hard to swallow. Every indication is that a single payer system would be vastly less expensive than our current mess of private insurers. In fact any system that increases people in a centralized government run plan and reduces people in multitudes of redundant piecemeal private plans shows better economics (due to economies of scale if absolutely nothing else, and realistically there are plenty of other reasons).

  11. Tlaloc says:

    1. Most countries (even places like France) have unsustainable growth rates for costs.

    2. Most countries spend quite a bit (e.g. France spends about 11% of GDP while we spend 16% of GDP).

    There’s a pretty glaring fact here- The US economy utterly dwarfs France’s. As in 7x larger. Were it not for the extra 5% of our GDP we waste on private insurer bull&^%$ we’d be very sustainable. That 5% of our GDP is ~1/3rd of ALL of France’s GDP. In other words we could not only pay for own universal health care system but pick up the tab for one out of every 3 frenchies for the same cost.

    It’s perfectly sustainable if we just stop arguing about it and do it.

    3. Countries that have systems that are primarily government run have pretty substantial rationing via non-price mechanisms.

    So do we, its called getting approval from the insurer. It drives me insane when people say “do you want a bureaucrat determining what care you get” and they only mean government bureaucrat and not the insurance company bureaucrats.

    BTW of the two the government bureaucrat is infinitely more trustworthy seeing as how they actually answer to an elected representative who wants your vote. The private insurer’s only goal is profit. The former has at least some incentive to keep you alive and happy. The latter is incentivized to let you die rather than pay for treatment.

  12. Grewgills says:

    Among the measures I would favor are means testing Medicare, limiting the deductibility of employer-provided healthcare insurance (I’d rather tax total compensation), revising the formula by which we subsidize medical education to favor primary care physicians, abolishing CON’s, just to name a few.

    I could go along with all of those.

    If by universal you mean coverage in the mid to high 90 percent range it maybe doable, but there are a few things to bear in mind.

    That is as good as we are likely to get so yes.
    I agree with your points 1-4 with the proviso that those other countries have slower rates of growth for health care (some much slower).

    I prefer a system similar to the Netherlands (complete with state funded medical education) over both single payer and our current system. There may be some issues with scaling but it is the best system I have seen. Some free market choice remains, all are covered, overall costs per capita are considerably less, and growth in costs is closer to sustainable.

  13. just me says:

    So despite being the wealthiest nation on earth we’re just too dumb to figure out the system every other OECD country makes work?

    I don’t think it is a matter of being dumb-it is a matter of some people wanting one thing-no matter the cost, others wanting something else and finding very few areas to compromise.

    The reality is that most americans like their healthcare plans. I like mine, and have never had any issues with it-and I haven’t even struggled to get therapy and care for my child with autism. The care that has sucked so far for us has been the military and especially the VA. I don’t want to trade what i have now for what i have experienced and my husband still experiences. Shoot I would like to see the government do more to fix successfully the programs they already run before they start tinkering around with my insurance.

    I do think there are things that need fixing-I am just not convinced what the Obama administration is proposing is going to really fix anything, and I am not convinced government provided or run healthcare will ever be satisfying for me.

    I would love to see a way for healthcare coverage to be separate from employment-I think this marriage is one huge part of the problem.

  14. just me says:

    So do we, its called getting approval from the insurer. It drives me insane when people say “do you want a bureaucrat determining what care you get” and they only mean government bureaucrat and not the insurance company bureaucrats.

    But with insurance companies you have an appeals process, and more often than not the real problem of what is or isn’t being covered isn’t with the insurance company but the insurance plan your employer chose when they contracted with that insurance company to cover your healthcare needs.

    Once again-I point out that half the problem with insurance IMO is that it is closely wedded to employment. You don’t get to choose what is covered your employer’s human resources department does.

    Oh-and back to my husband’s knee that was fixable had the Naval doctor ordered an MRI but didn’t and instead my husband got no care until his knee became a major problem and was no longer fixable-my husband had nobody to appeal to and he wasn’t even allowed to sue the doctor that ignored his complaints of continued pain.

    When the government is the only one getting to decide what your care is, who do you appeal to? Do you get to sue the government? At least you can sue a private insurer if they totally drop the ball.

    BTW of the two the government bureaucrat is infinitely more trustworthy seeing as how they actually answer to an elected representative who wants your vote.

    LOL this is naive. The government bureaucrat will answer to nobody because he will be a civil servant with tons and tons and tons of union protection from any dumb decisions they make. They will be far more protected by the union than any bureaucrat at a private insurer.

    At least with a private insurer you have the option to look elsewhere-where do you look if the government is screwing you over? And with a private insurer you can hire an attorney and go to the courts-this may not be a viable option if the government is in charge.

    Frankly I don’t trust the government to make these decisions-and I find it laughable that somehow just because it is the government it is going to somehow be better. it will be the same old problems, but with even fewer options.

  15. Bill H says:

    “If you subsidize the consumption of health care people will consume more health care.”

    While I am in agreement with your overall point, I’m not sure I buy this particular arguement. I’m not sure people will suffer the indignity of a doctor’s visit or ask for an x-ray merely because it’s free.

    There is, however, the point that in order to change the cost of something you really need to change the way it is made, or the way it is delivered. Merely subsidizing or altering the payment method is not going to alter the cost.

  16. steve says:

    “4. Places like France, the Netherlands and Singapore have systems that rely more on the price mechanism, cost sharing, and mandatory savings to help keep things on a more reasonable basis.

    Bottomline is that the price mechanism in all likelihood should be a serious component in any health care reform.”

    I think France’s system sounds like a reasonable system also in many ways. They currently have 20-25%, IIRC, of their docs working on private payments only. If the costs of the system keep going up, people can shift back to the cheaper govt. program. Most of your proposals do not sound bad. I would love to see an exemption made for some state or block of states to try Kling’s theory out. Why hasn’t some state done that already? Are there no red states out there?

    In pure economic terms, your theories about prices are correct. In reality, when dealing with real sick people, I am much less certain. In over 25 years only 2 or 3 times have I had people ask about costs. Even people without insurance. It is an inherently unequal information scenario. Also, in a classic Adam Smith invisible hand of the market scenario, both parties are free to walk away from the deal. I also find it disturbing that all the free market stuff that sounds so good has no working model anywhere.

    On rationing, these places you cite as having rationing have roughly similar outcomes to what we have. Is rationing to say no to care that was really not needed? Maybe that is subsidizing?

    Steve

  17. I also find it disturbing that all the free market stuff that sounds so good has no working model anywhere.

    I suppose all those new pharmaceuticals and new medical therapies and new medical technologies just materialized out of thin air.

    BTW of the two the government bureaucrat is infinitely more trustworthy seeing as how they actually answer to an elected representative who wants your vote. The private insurer’s only goal is profit. The former has at least some incentive to keep you alive and happy. The latter is incentivized to let you die rather than pay for treatment.

    Whatever. Though I will note that no one on my company’s health insurance plan has been denied any treatment, whether it was to save money or just to let them die. BTW, I can always change insurance companies with a phone call. Changing governments is a lot harder.

  18. floyd says:

    “”BTW of the two the government bureaucrat is infinitely more trustworthy seeing as how they actually answer to an elected representative who wants your vote.””
    “”””””””””””””””””””””””””””””””””””””””””””””””””

    With only 537 elected officials for 300,000,000+ people, it’s getting hard to make the case for accountability.Especially when you have election corruption on a scale like Illinois, Or voting without proof of ID or residence, like Ohio or Minnesota. Not to mention a reelection rate that would be the envy of countries like Russia or Iran.

  19. odograph says:

    Given the strong consensus for change above, it’s surprising that the current legislation has so little change. Is it just that mega-corps control Washington?

  20. floyd says:

    Odograph;
    Perhaps a “strong consensus” here is, with a broader view, merely a “tempest in a teapot”?

  21. An Interested Party says:

    Hardly a “tempest in a teapot” except, maybe, to some people who have what they consider great healthcare and, perhaps, could care less about anyone else’s health coverage(or lack thereof)…

  22. floyd says:

    Aip;
    Setting aside your knee-jerk tendency to bite at my ankles every time I post,there are less than a dozen commenters here so far, hardly enough to form a “strong” enough “consensus” to expect to be “surprised” that current legislation has been so little changed by it!
    Snipe on, brother Snipe on!!

  23. just me says:

    to some people who have what they consider great healthcare and, perhaps, could care less about anyone else’s health coverage(or lack thereof)…

    Except why should we break what works for some since others can’t have it?

    Why not actually try to diagnose why some people don’t have insurance and figure out how to fix that problem?

    But I don’t think it is selfishness or a lack of sympathy for those without for me to say I like the insurance I have and I don’t want to see it taken away and replaced by something that may not be as good.

  24. An Interested Party says:

    re: floyd July 18, 2009 13:37

    Oh my, the delusions of someone with an inflated opinion of himself…I hardly “bite at your ankles” every time you post something…do try to keep that ego in check, ‘k? I was referring more to the consensus among the American people, as opposed to just the opinions of people around here…

  25. Vech says:

    “So do we, its called getting approval from the insurer. It drives me insane when people say “do you want a bureaucrat determining what care you get” and they only mean government bureaucrat and not the insurance company bureaucrats.”
    I have seldom failed to talk to a live person with a private insurer, or to receive a favorable resolution to a problem. On the other hand, I have aged considerably trying to reach a human being in almost every government agency I try to contact. It makes no difference whether it’s federal, state or local. They do not care. Repeat – they do not care. There are no consequences for poor or nonperformance. Incompetence and apathy is rampant in government and there is no reason to expect it to be different if this monstrosity is passed. The government has no business selling cars or health insurance.

  26. An Interested Party says:

    On the other hand, I have aged considerably trying to reach a human being in almost every government agency I try to contact. It makes no difference whether it’s federal, state or local. They do not care. Repeat – they do not care. There are no consequences for poor or nonperformance.

    You’re lucky to have had such good outcomes with your insurer, but I’m sure that there are other people who have had bad experiences, even ones as bad as your nightmare scenario regarding government agencies…as for caring, the flip side of that is that private insurers are in the business of making money, so I’m sure we could find horror stories of people who have been denied coverage or benefits because such things would put a dent in the bottom line…sorry to interrupt the anti-government jihad and capitalism bandstand parade, but it is quite a silly caricature to paint government as simply evil and private business as a wonderful panacea…

  27. just me says:

    but it is quite a silly caricature to paint government as simply evil and private business as a wonderful panacea..

    Well you can add me to the list of people who haven’t ever really had huge issues with their insurer but has a whole slew of apathy and problems dealing with government agencies.

    But I am not naive enough to think that all private insurers are sweetness and light-but at least with a private insurer there are other avenues of complaint. I think the real naivete is in believing that the government run system won’t be just as bad, when it comes to issues of having things covered and issues of appeal and what not.

    I am pretty sure the government is not going to better when it comes to costumer service, when there are problems with coverage, and I only have to use my experiences while in the military and with the VA to know it likely will be worse.

  28. vech says:

    AIP: Good doctors also help. My doctor arranged for me travel 100 miles to use an open MRI. As a result an abdominal aneurysm was discovered and six months later was found to have enlarged. Surgery has corrected it, but I am quite sure the government would not have allowed that scenario to occur. I am grateful for private insurance, and grateful for doctors who I can discuss my issues with. And no, I don’t have the greatest plan in the world, but it’s mine and I chose it. As I stated before – the government needs to stay out of business. If you want to suck on that teat until it’s emaciated, go right ahead. just don’t do it on my nickle.

  29. Mike G says:

    Also, I would like to add the fact that the government wants everyone to have health care for many reasons that are less obvious. For example, when everyone has a record from being treated under this new socialized health care system you will become one more number the government can check up on. This is how they make money. They need people to justify their expenditures, and initiatives they’re pushing forward through legislation . Citizen’s become future investments that the politician’s, lobbyists, and CEO’s set up for their future pocket’s.

    This mentality of governance in my opinion seems to ignore the Founder’s of this nation’s original vision and, purpose behind the making of our Constitution. We our suppose to be a Republic, and less a Democracy. The governments only involvement in it’s citizens should be to establish law, and enforce it only when an individual steps over the line. People should feel that they’re protected, and safe under their rulers. Anything beyond this point pollutes the political atmosphere. It becomes more about personal gain, and self interest. This can become disastrous when trying to make decisions without being biased.

    This is why I have concluded, that this idea for government run Health care is not the right way to go period. It might have some advantage’s at first, just not in the long run. It will further the corruption in politics, and not help the nation in the future. The businesses, and health care should be left to our private sector.

  30. An Interested Party says:

    re: vech | July 18, 2009 | 08:51 pm

    So I guess that doctors who work for and/or get paid by the government are automatically no good because the government is involved? And how do you know for certain that the government would not have allowed that scenario to occur? How do you know that under another private insurance plan, that scenario would have been denied to you? As for teats and your nickel, that ship has already sailed, as the government already has a hand in healthcare involving seniors, the poor, government workers, and the military…I’m sure there are plenty of horror stories there (just like in the private sector) but I’ll bet there are a lot of satisfied customers as well (just like in the private sector)…

    For example, when everyone has a record from being treated under this new socialized health care system you will become one more number the government can check up on.

    No doubt followed by the black helicopters…

    The governments only involvement in it’s citizens should be to establish law, and enforce it only when an individual steps over the line.

    That genie was let out of the bottle a long time ago, and just about any conservative attempt to put it back in has failed miserably…

    This is why I have concluded, that this idea for government run Health care is not the right way to go period.

    Outside of the public option, which is only a portion of what the president wants to do, and may not even pass in the Congress, how exactly will the government be “running” healthcare…

  31. MikeG says:

    Outside of the public option, which is only a portion of what the president wants to do, and may not even pass in the Congress, how exactly will the government be “running” healthcare…

    How else will health care get paid for… The government controls the budget. They also would control the amount of money, and where it will be distributed out to…

    By the way there are no Black Helicopters here. Just studied my constitution. I know it will never be that perfect. Of course, we have already done many things that don’t really follow the constitution. Often times learning the lesson the hard way. I just don’t think it’s irrelevant, and should be respected as premier guideline when making important decisions that affects the country, and the People. You don’t want to turn a bad crisis into a worse crisis. Know what I mean?

    Let me guess you don’t.

  32. An Interested Party says:

    Oh, I suspect I know exactly what you are afraid of…

  33. just me says:

    So I guess that doctors who work for and/or get paid by the government are automatically no good because the government is involved?

    Well I learned pretty quickly when my husband was in the military that more often than not the civilian doctors that worked for the military hospitals and clinics were pretty worthless. The doctors in uniform were generally good doctors.

    But what I have really learned, and assume may become moot if the government starts setting the fees, is that the VA can’t keep doctors. Over the course of two years my husband has had 5 different doctors, and all 5 of them think they know better than the last guy and start playing around with his medications etc. He had at least one doctor that I thought was a complete a total loon-and I am not convinced he even bothered to read my husband’s medical history.

    I don’t know what explains the high turnover rate for the VA doctors, low pay would very likely top the list if I had to make a guess.