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NRO’s domestic-policy blog, by Reihan Salam.

Is Peter Orszag a Health-Care Spending Truther?



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As I explained yesterday, Wednesday’s economic data showed a huge jump in national health-care spending in the first quarter of 2014, following years of relatively slow growth in that sector of the economy. This is discomfiting for Obamacare supporters, who tried to sell the law on the grounds that it would control health spending. In the short term, it seemed inevitable that it wouldn’t, as Obamacare enrolled people in insurance and forced more people into more comprehensive health-care coverage. (Obamacare defenders will also tell you the improving economy is driving up spending — they’re right, although they were very eager to downplay the idea that a bad economy could hold down health spending when they wanted to credit Obamacare.)

Obamacare defenders may still be right that the law will restrain spending in the long term, but Peter Orszag, one of the key budgetary minds behind health-care reform and once Obama’s budget director, is mounting a spirited argument that it’s not boosting spending nearly as much as we think.

And there’s a good chance he’s right, to some extent: The Bureau of Economic Analysis’s preliminary GDP numbers, they always explain, are “based on source data that are incomplete and subject to revision.” Even the headline number often changes substantially, and health spending can be even more unreliable because the service economy is hard to measure, period, and health payment systems are particularly complicated.

So there’s no reason to put faith in the exact number we have for growth in health-care consumption expenditures, 9.9 percent on an annual, seasonally adjusted basis — it might be a good bit lower. But health-care spending is definitely growing, and I will bet that it is definitely growing faster than it did in over the last couple years. Time will tell, but Orszag’s case against this idea for now is pretty weak.

He made his case originally on Twitter, pointing out that health-care consumption is apparently up dramatically, while this morning’s jobs report, for March, didn’t show substantial growth in health-care employment. He’s right, and that’s been the case for a few months now, actually. Here’s a chart of year-on-year growth in health-care jobs, notice the low level it’s been at for a few months:

Health-care employment is growing, though: It continued growing throughout the entire recession, and was growing a good bit faster than overall private employment (especially 2011–2013) at a time when growth in health consumption costs was relatively subdued. Orszag wasn’t the only person to make the point about the divergence here: Dan Diamond of the Advisory Board (an extremely useful source to follow on Twitter for health news, I should say) did too.

But we are now pretty sure health spending grew in the fourth quarter of 2013 faster than it had been for the past few years, and we didn’t see strong jobs growth then, either (December 2013 was actually one of the worst months in years for health jobs growth). So this doesn’t seem like a great argument against the possibility that we saw high growth in health spending without a spike in health-care employment this quarter.

The argument does have an economic logic, though, as Orszag explained on Twitter. If health-care spending is rising without a commensurate increase in employment, you could argue we’re seeing a huge, unexplained jump in health-care productivity. Massive:

This spike, being that large, probably is showing some of the error in the headline spending number. But it’s perfectly plausible that health-care spending could be shooting up without a comensurate jump in employment.

How? It seems possible that the solid growth in health-care employment over the past few years wasn’t just a response to an aging population and growing health-care demand, but also even greater future demand for health care thanks to Obamacare — so there was room for productivity to increase when spending picked up. Providers rightly didn’t want to be caught flat-footed. Labor is also, as Orszag knows, not the only input in an economy, and skilled health workers are a limited resource in the short term — I don’t know what’s happening with health-care capital investment (health construction spending is flat), but some of it can be increased more quickly than more nurses and doctors can be trained.

Moreover, Orszag does take into account health-care price inflation when looking at the jump in health spending relative to health employment, but this “real” number may not be that much more useful. Medical pricing is notoriously odd and opaque, which is one reason health-care price inflation is hard to measure, too. If more people are using health care than last year, it’s possible providers have just raised prices in some places. Patients also could, for instance, be accessing a lot more prescription drugs without any commensurate increase in “health-care” employment. (Obamacare removed some of the incentives for seniors to control their prescription-drug spending that had helped the program run really well — hooray.)

Orszag has a different, odder explanation for how spending might look like it’s jumped, but hasn’t: One of the big parts of the Affordable Care Act is expanding Medicaid, and Medicaid, he says, is automatically booked as a boost to GDP even if it doesn’t translate into people using more health services. Business Insider, who interviewed him, says he argues a Medicaid enrollment translates into “an increase in both [a Medicaid recipient’s] income and spending, even if they don’t actually consume health-care services.” This phrasing doesn’t sound quite right, but Orszag is describing something like a real phenomenon: When someone enrolls in Medicaid in a lot of states, that will trigger a “capitation payment” from the state government to a managed-care organization that uses it to pay for whatever services the enrollee consumes that month, or quarter, or whatever. (This isn’t all of Medicaid spending even in this group of states — some of it is still paid by the state as the services are consumed.) That would count as health spending, and it was just an enrollment.

Where Orszag seems wrong is that a capitation payment, or other estimated payments, is calculated to reflect how much health care the enrollee is expected to use. The payment that’s counted as GDP activity, in other words, should be pretty close to the amount of health care that actually gets used. States and insurers go to a great deal of trouble to get those numbers right (and these new ACA enrollees might exceed them, given that they may have pent-up care needs).

Orszag is not the only person skeptical of these health-spending numbers: Jared Bernstein, formerly chief economist for Vice President Biden, expressed similar if less detailed concerns in an interview with BI’s Brett LoGiurato. As I said at first, they could well be right to some extent — this number is going to be revised, and it’s more likely to be revised down than up, given that it’s an outlier.

But the trend it represents seems plausible, even unavoidable: Covering more people the way Obamacare does it is going to push up national health spending in the short term, after it rose quite slowly for a few years. This doesn’t prove Obamacare a failure, but expect people like Orszag and Bernstein to be alternate between defending such increases as sensible if not necessary, and arguing that they’re not as big as you’d think. Sometimes they’ll have a point, but trying to reconcile the promises of Obamacare and the reality has been a difficult dance for liberals over the past six months. The music isn’t about to stop.



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