What is the Real Story on Health Care Costs?

December 12th, 2013
in econ_news, syndication

Econintersect: President Obama has been speaking out about the success of PPACA (aka Obamacare or Affordable Care Act) in bringing down the rate of growth of healthcare costs. Others have said that such claims are at odds with "the most basic facts" about health care spending.  Spokesmen for the AEI (American Enterprise Institute), Thomas Miller and Abby McCloskey presented a very critical review of cost reduction claims last week in The Wall Street Journal.


Follow up:

The White House Council of Economic Advisors (WHCEA) has issued a report claiming that data indicates a dramatic drop in growth of the nation's health expenditures during the years 2007-2010 by to half of the previous eight-year average.  Then another drop by 1/3 for the years 2010-2013.  (See Figure 3 below.)  The report claims that health care inflation is the lowest in 50 years.  Jason Furman, chairman of the WHCEA, said the report offers positive economic implications (USA Today):

"Reduced health care costs for employers could lead to 200,000 to 400,000 new jobs per year by the second half of the decade.  If just half the recent slowdown in spending can be sustained, health care spending a decade from now will be $1,400 per person lower."

The report issued by the Office of the President contains the following graph:


The president's report also shows the following graph indicating that health care costs are now increasing at the same rate as the overall inflation:


The AEI analysis is not discussing the same numbers.  Miller and McCloskey wrote in the WSJ article:

National spending on health care is projected to reach a record $2.9 trillion in 2013, according to the Centers for Medicare and Medicaid Services. This is more than 25% above pre-recession spending levels in 2007. Health-care expenditures per capita and as a percentage of GDP are also at record highs, expected to top out this year at $9,216 and 18% respectively.

The only apparent bright spot is that the average annual rate of health-care spending increases has slowed. Over the past three years, growth in health-care spending averaged 3.9% year-over-year, considerably slower than the historical average.

The authors do not provide links to their references to Centers for Medicare and Medicaid Services (CMS) (above) and the Congressional Budget Office (elsewhere in their Op Ed).  Econintersect has tried to find appropriate publications that might have been their sources.  Here is the location of a CMS report that may have been their reference, which contains the following table:

Click on table for larger image.

Miller and McClosky point out that there are lots of things that have been reducing health care cost growth:

However, annual health-spending growth rates began to decline a decade ago. In 2002, health-care spending grew by nearly 10% in a single year. The growth rate dropped to 7.1% in 2004, 6.2% in 2007, and bottomed out at 3.9% in 2009-the worst year of the Great Recession, where it has stayed ever since.

Again the WSJ is quoting data from a different source (not given) than The White House which indicates that health care cost inflation has been below 5% for the past 20 years. (See Figure 2 above.)

Both of the positions presented are based on data but clearly not the same data.  To make sense of trends in health care costs there is clearly needed a scientific (rather than political) review of data.  And once the real data is defined then a proper analysis should be carried out by non-political actuaries.

And then there are reports that can best be described as anecdotal, even though they apparently represent a sizable sample, such as the one reported by Jim Angle in an article at Fox News:

"...one insurance plan that asked not to be identified analyzed its pool of 375,000 people and found that,  even after subsidies, only 10 percent would actually see a decrease in costs, while one third would face significant rate increases as a result of ObamaCare. "

Such reports could be representative, could be too optimistic about cost reductions or could be too pessimistic.  There is simply no way to evaluate what such a report means.

This brings us back to the headline:  What is the real story on health care costs?  The Washington Post published a recent "Fact Checker" article about the president's claims for cost savings and couldn't reach a conclusion.  It is not only Econintersect which is confused.


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