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Good Cop/Bad Cop on U.S. Health Care Inflation

Posted by John McDonough  January 23, 2012 10:50 PM

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Within two days, from two highly respected health economists, we see two stunningly different interpretations of the current and now accepted dramatic lowering in U.S. health care inflation, as estimated by the independent actuaries at the federal Centers for Medicare and Medicaid Services (CMS). This difference is not academic -- and the winning interpretation holds huge consequence for U.S. health policy and the U.S. economy.

Our Good Cop is Karen Davis, respected head of the Commonwealth Fund, commenting in a January 18 CF blog on the new cost projections from the federal government:

"CMS is projecting lower health spending over the rest of the decade. While it is almost certainly the case that the poor economy is having an effect on current spending, the recession doesn't plausibly explain why projected health spending in 2020 is substantially below estimates made just two years ago. Either the original estimates were too high, or the tectonic plates underlying the health system are beginning to shift in anticipation of new incentives under health reform or in response to health care leaders' efforts to transform care over the last decade. ... Already, spending is far below the trajectory projected to result from implementation of the Affordable Care Act. In fact, reduction in utilization of health services and trims in payment rates under the Affordable Care Act more than offset the projected cost of covering the uninsured."

And now for our Bad Cop, Princeton Economist Uwe Reinhardt in a January 20 blog entry in the New York Times:

"...nothing in the history of health spending in the United States suggests that this is the time to break out the Champagne to celebrate that victory. After all, low rates of spending increases in 2009-10 could just be the lagged effect of the deep recession in 2008-9. There is evidence in the literature that health spending does not completely march to its own drummer, regardless of what happens in the rest of the economy, but instead tends to rise and fall somewhat with the rest of the G.D.P., albeit with a lag of one to two years. The safest bet is that on the long road to eventual zero excess growth in health spending, we will ride up and down quite a few more times on the health-spending roller coaster."

So much to ponder and discuss here in these radically different interpretations!  Let's start with the good. These estimates are strikingly better than estimates made nearly two years ago at the time of President Obama's signing of the Affordable Care Act (ACA) in March 2010.  They follow a predictable pattern. The Congressional Budget Office, Congress' non-partisan budget estimator, historically underestimates savings from major health reforms, and is following a familiar pattern. In 2010, CBO estimated that the ACA would lower the federal deficit -- now that estimate is even much better. (Will Republicans ignore this analysis and continue to push for ACA repeal? Yup.)

It also follows a broad historical pattern. During Reagan era of the 1980s, U.S. health costs exploded and, for the first time, the U.S. became the outlier in international health spending. In the Clinton era of the 1990s, we saw a stunning moderation in health spending growth. In the Bush II era of the 2000s, national health spending exploded once again. Now, in the 2010 decade, we are experiencing yet another stunning deceleration in health spending.

See a pattern here?  I do.

Republican eras emphasize an unregulated market as the route to control health spending, when all it does is free firms to maximize revenues and profits. Democratic eras emphasize controlling costs, including governmental controls. While the controls are never perfect, they worked better than the alternative in these four cases.

But let's consider the bad. Uwe Reinhardt talks from experience. What goes down in health spending will go up, and what goes up will go down. When the rate of health spending growth goes down, everyone lets down their guard; costs begin to rise; and it takes years for society to summon the political will to pressure them downward again. Yes, these new CMS projections look positive. And they can turn on a dime, depending upon real decisions WE make as a society. We can take advantage of this period to lock in policies to prevent future inflationary surges, or we can relax controls, believing we have tamed the beast.

This also matters in Massachusetts. Medical providers and insurers now argue that tough cost control legislation is unneeded because costs are getting under control -- witness the new lowering of health insurance premium increases, backed up by deals such as last week's Partners Health Care and Tufts Health Plan renegotiation. These are great signs -- and it's important to notice how they fit the national pattern.  They don't buck the trend -- they follow it.

Here's a favorite quote of mine from the French epidemiologist, Rene Dubos:

"When the tide is receding from the beach, it is easy to to have the illusion that one can empty the ocean by removing water with a pail."

We are in a new place in the U.S. right now on health care costs-- thanks significantly to the ACA. We can lose this moment by misunderstanding the nature of it.

So who is right? Karen Davis or Uwe Reinhardt? We don't know, though we do know this: the result will not accidental, it will be because of the choices and decisions we make now.

This is not the time to let down our guard. This is the time to solidify the gains.

(Correction: The Rene Dubos' quote is now accurate -- apologies!)


This blog is not written or edited by Boston.com or the Boston Globe.
The author is solely responsible for the content.

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About the author

John E. McDonough is a professor of practice at the Harvard School of Public Health. He is the author of the book “Inside National Health Reform”, published in 2011 by More »

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