More on the history of health care cost inflation

by on December 2, 2010 at 5:35 am in Economics, Medicine | Permalink

TheIncidentalEconomist serves up a banquet.  Austin Frakt emails me (do not take him to be endorsing the stated view, which is speculative; there were further emails):

One hypothesis is that health care costs steadied in the 1980s as care was shifted from inpatient to outpatient settings. It's possible that outpatient surgeries were both more profitable to providers and less costly to payers. The graph at the following link doesn't quite go back far enough but it is plausible that this shift began in the early 1980s. Note that the shift fully played out by 2000, though perhaps the bulk of cost savings was already wrung out of the system in the first few years or was overwhelmed by other factors: http://theincidentaleconomist.com/wordpress/inpatient-vs-outpatient-surgeries/

Aaron Carroll looks at outpatient care and questions whether that was the key shift.  Carroll also redoes the chart.  Here is Austin's final statement.

1 Andrew December 2, 2010 at 7:08 am

There is still a "jump" although smoothing the chart diminishes it. But that's not the important point. First, if you try to make the chart into straight lines there is still a slight inflection point around 1980. Second, that point is about where the US escapes from the pack. Leveling off? I don't think they look at a lot of stock charts. Just because something is flat for a few years doesn't make me assume some underlying fundamental changed. The slope is not =1, and that's mathematically from the fact that deltaHealthcare/deltaGDP > 1.

What the 90's leveling off and 2000's resumption shows is the sensitivity of healthcare to government financing rules.

I don't consider a moderation in a growth rate to be a leveling off. Why are the costs continuing to increase, and I think one answer is that we can't buy it from China. So, one question is whether healthcare should really be scaled to asset prices rather than GDP. Around 1980 seems about the time we gave up investing in things that made things and started investing for capital gains.

2 Andrew December 2, 2010 at 7:52 am

Because I think people missed the point. See above. The point is we didn't go from single payer to not single-payer in the late 70s to early 80s.

So, all the people who think there is but one variable in healthcare, "whether or not you are single-payer", and that is the cause of costs should have some 'splainin' to do.

It's possible that all the other other countries started cost controls around that time, but even so, what did they give up?

3 Bill December 2, 2010 at 9:05 am

John Dewey, Your comments are not inconsistent with HMOs also having a role. I have looked at indemnity and HMO premiums over time previously, and the latter during this period constrained the other. In addition, if you look at discounts for access to the networks, and the managed care protocols and the results, the lions share is actually from HMO and the growth of managed care networks. If you want to experiment on this further, I suggest you look at health care costs in states with high managed care penetration and those without, and the development of healthcare costs during this period. I have in connection with HMO merger investigations where I defended HMOs.

4 John Dewey December 2, 2010 at 10:59 am

"Health care costs steadied in the 1980s?"

No, of course not. What happened is that nominal GDP growth fluctuated quite a bit, while nominal health care expenditures did not. So the chart that Tyler showed in the earlier post shows a pop in health expenditures per GDP (in 1982, not 1980) and then what appears to be a flattening. Here's the nominal changes in U.S. GDP and U.S. health care expenditures during that period:

Year…..GDP chg….Health exped chg

1978……..13%…….12%

1979……..12%…….13%

1980………9%…….15%

1981……..12%…….16%

1982………4%…….13%

1983………9%…….10%

1984……..11%…….10%

1985………7%……..9%

Source: U.S. Department of Health and human Services

For health care expenditures, the nominal growth declined from 15% and 16% in 1980-1981 to 10% and 9% in 1984-1985. This reflects a decline in inflation rather than a real decline in health care spending growth.

5 mulp December 2, 2010 at 12:27 pm

Because I think people missed the point. See above. The point is we didn't go from single payer to not single-payer in the late 70s to early 80s.

No, what happened in the 70s and accelerated in the 80s was:

1. health care and insurance should be for profit because profit maximizing leads to lower total sales – eg, the total revenues in the computer industry is lower today than in 1950 because of profit seeking;

2. polio, small pox, et al vaccination are so expensive because the lack of patents don't allow prices to be increased and drug cost cut as has been done with drugs treating conditions leading to heart disease and stroke – government research needs to be patented and turned over to for-profit drug companies so they can lower costs by charging higher prices.

3. providers of health care should charge insurers only the marginal cost, with overhead, investment, and non-payment paid for by the uninsured

4. all sickness is by choice so insurance should rationed to only the healthy: ALS and MS are lifestyle choices; everyone knows how to prevent heart attacks from watching the doctor ads recommending smoking to reduce stress, and listening to your mother say "clean your plate, children are starving in Haiti", and the crystal clear uncontested recommendations on cancer screening.

In other words, 1980 was the inflection point between health care being a community effort and responsibility, a public good, and health care being an industry for generating private profit by leaving no money on the table of any transaction.

By 1985 the reality of this policy shift led to the unfunded mandate of EMTALA to prevent the outrage over the dying sick and injured being turned away for lack of money to die in public on the streets to be photographed by the press. And to avoid the majority of voters making health care a factor in their decisions, restrictions on employer benefit plans prevented most voters from being denied health care, as well as continued socializing organs and diseases (kidneys and dialysis, HIV, rare diseases).

The US changed from a system of public health care as the floor that varied by region and community, enhanced with privately socialized hospital and doctor augmented by public-private socialize prepaid care (the Blues); to an increasingly profit seeking enterprise that constantly lobbies government to obtain taxpayer payments to increase profits, using denial of care as the prime lobbying tool to get government payment to increase profit.

The health care providers around the world all seek profit opportunity, with only a few nations attempting to preclude profit. Even the UK NHS has turned to using for-profits to improve health outcomes and limit cost increases (unsuccessfully), and Switzerland's health care system is very much like the US, with Swiss drug makers having almost as much share of the brand drug worldwide profits as US firms, so the US is not unique in having for-profits. Ultimately, a large segment of the US population is covered by the same systems of each of the UK, France, Japan, Canada, etc.

Further, all the population characteristics of the US can be found in other nations to greater extremes – US aging, but Japan is aging faster with half the cost; technology, but Japan and others have more CT scanners and pay for more scans per capita; fat people, but some EU regions have more fat people better health and lower costs; etc.

The single factor in common between the nations with outcomes better than the US and lower costs (significantly) is universal coverage.

The US has moved to fewer and fewer covered, with denying coverage and selectively denying treatment touted as the best cost reducing methods.

The nations with equal or better outcomes have a robust minimum standard of care that covers everyone by some method that might be public funding, or a government mandate to privately pay.

In 1980, health care costs were seen as too high and rising too fast world wide, so the difference between the US and the rest was in the ability to deny coverage and treatment selectively to classes of people. The US picks victims to pay the burden of cost cuts, while in the rest of the nations almost everyone suffers.

But in the US, politics prevents the health system policy victims from suffering the consequences of survival of the fittest. We have the equivalent of destroying the forest for quick private profit, then spending public billions more than the private profits to build multiple artificial forest havens to preserve each species from extinction.

No conservative should be allowed to talk about health without first getting EMTALA repealed, along with all Federal funding for public health clinics and such, that mitigate the suffering and death of those chosen to be health care system victims. No one who voted for the Terry Schiavo law should be allowed to talk about health care until it is a universal right in the US.

6 J Thomas December 4, 2010 at 7:54 am

Here are a couple of metaphors.

Imagine that there is a rare orchid which is hard to grow. It takes greenhouses, and a skilled gardener working full time can produce five (5) blossoms a ear. Everybody agrees that the blossoms are valuable. The President wears one on his lapel when he his inaugurated. Etc. But it is just inherently expensive. If somebody were to say that every US citizen deserves to have one each year, that would be obviously stupid. Because to provide 300 million orchids would require 60 million gardeners, and the labor force is less than 120 million.

Now imagine a computer chip. It takes a billion dollars to build the factory that makes the chips, and demand is projected at a billion chips. But it turns out that demand is higher than expected, and an extra 300 million chips can be sold at above variable cost. Is that a problem? Not at all. The factory just cranks out an extra 300 million chips. It's cheap to do that, because variable cost is low.

If medical care is more like a rare orchid, then obviously we can't provide it to everybody. It would bankrupt us. We can only give it to the people who deserve it most, or who can pay the most, etc.

If medical care is more like a computer chip then it costs hardly any more to give it to everybody than it does to give it to a few. The only concern is how to arrange differential pricing so that the customers who pay more don't complain too much.

Which is medical care like? Not either one, not in the middle, somewhere out in left field. Which do we want it to be more like? I say more like the computer chip factory. Because that's what we can afford.

When I look at it this way, I get the beginning of an idea about pricing. Suppose the government were to pay the fixed costs, and individual patients pay the variable costs. The government builds the hospitals and stocks them with ultrasound and MRIs etc. (If people think the government undersupplies those they can build their own for customers who are willing to pay to price to get the best right now.) If individual patients pay the variable cost that might be usually low enough to get by. If very poor people get even those costs subsidised it isn't as terrible as when you pay more for insurance than you can afford while they get it all for free.

Patents should be treated as a fixed cost, to be negotiated between medical technology corporations and the US government.

7 ChristineWithRegence December 8, 2010 at 12:54 pm

The costs of health care soar when prices and information aren't transparent. Check out the explanations at http://www.whatstherealcost.org/info-desk.php?cat

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