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.