Noah Millman on the Legacy of the 1980s for the U.S. Health System

It is important to differentiate between cost growth and a high level of health expenditures, as Noah Millman did in a truly excellent post published early last month:

[I]f we look at spending on an internationally comparative basis, and look at percentage changes here and elsewhere, they aren’t rising very rapidly here. From 2002 to 2008, US per-capital health-care spending grew a bit faster than five and a half percent a year. That puts us in the middle of the pack of industrialized countries; Dutch spending grew nearly 7% per year, Canadian spending more than 5.7% per year, and UK spending more than 7%; by contrast, French spending grew less than 4.5% per year and Swiss spending grew a bit more than 5%. A similar picture obtains if you look back at the previous six-year period; American health-care spending per-capita grew a bit under 6% per year in that period, a slower rate of growth than the Dutch, British, Danes or Swedes, but faster than the French or Swiss, much faster than the Germans, and slightly faster than the Canadians.

The problem is not primarily the high growth rate of our health-care spending; the problem is precisely the high level of our health-care spending. Which in turn means that a growth rate that looks reasonable when compared internationally is unsustainable in terms of the bite it takes out of the domestic economy.

We got into this mess primarily because our per-capita health-care spending growth rate didn’t slow as quickly as our peer countries. Back in 1972, American health care was already dramatically more expensive on a per-capita basis than the British system, which operates very differently. But it was only modestly more expensive than Danish, Swedish, Canadian, German or Swiss health care. And health care expenditures were rising across the board in this period. From 1972 to 1978, American health care expenditures per-capita grew by a bit over 12% per year. But German per-capita expenses went up by 14%. British per-capita expenses went up by just under 12%. French per-capita expenses went up by over 13%. Swiss expenses went up by 11.3%. And this was the era of double-digit inflation; similar increases in prices and wages in all sorts of sectors were normal.

The problem is that America maintained a very high rate of growth in per-capita health care expenses well into the 1980s, well after inflation in general was tamed, and didn’t bring our growth rates down to internationally comparable levels until the 1990s. From 1978 to 1984, America’s per-capita health-care expenses grew nearly 12%, versus a bit over 8% for the Netherlands and a bit over 9% for Germany. In the next six-year period, America’s expenses grew over 9%, versus less than 7.5% for the Netherlands and a bit over 5% for Germany. Similar comparisons obtain with Switzerland, Canada, Belgium, the UK, France. It was in the 1980s that American health care went from being modestly more expensive than other wealthy countries with mixed public-private systems, to being wildly more expensive than other wealthy countries with mixed public-private systems.

Because we’re growing off such a high cost base, even as we have dramatically reduced the rate of growth of per-capita health-care expenditures the absolute bite we’re taking out of GDP is getting out of hand. From 1978 to 1990, German heath-care expenses as a percent of GDP did not change; they were 8.4% at the start of that period and 8.3% at the end. During the same period, American health care expenses as a percentage of GDP went from 8.4% – the same as Germany – to 12.4%, a nearly 50% increase in relative share of GDP.

That is really, really fascinating. As Millman goes on to argue, this reframes the debate over health-system reform. It implies that we have a few broad approaches at our disposal:

Either we have to grow nominal GDP much more rapidly than other developed countries while holding health-care cost inflation down to levels comparable to other developed countries.

Or we have to slow health-care cost growth to rates much lower than those achieved by our peer countries, and keep those growth rates low for an extended period, without, in the process, sacrificing growth in nominal GDP.

Or we have to take a one-time axe to health-care costs in some fashion so that we can, from that point, grow from a more manageable base.

The first is obviously the most desirable scenario, and one gets the impression that it is the strategy most politicians are banking on. The second will be hard to achieve without sweeping system-wide reform and the third is impossible without vanquishing large, powerful political constituencies. 

One hypothesis regarding the source of rapid growth in health expenditures is that Medicare, which underwent large-scale structural change in the early 1980s, was at least partly to blame. Uwe Reinhardt, a left-of-center health economist describes the origins the DRG system for Medicare outpatient services: 

The DRG system, which is, in essence, a system of centrally administered prices, has had its critics in the United States over the years. None other than Tom Scully, the Medicare administrator during President George W. Bush’s first term, has disparaged Medicare as a “dumb price fixer.” Ironically, that very system was originally put into place by none other than the staunchly market-oriented Ronald Reagan. In any event, since it was first introduced in 1983, the DRG system has had a number of imitators abroad, notably in Australia and Germany. …

When did the DRG system emerge in Australia and Germany and did it have system-wide consequences?

The Medicare payment system is highly complex, in part because government payment systems must observe rules of fairness, strict accountability to taxpayers, and other social goals not imposed on private payers. Critics of the system sometimes overlook the fact that these requirements pose administrative challenges not shared by private enterprise. However, the myriad of distinct payment systems for U.S. private insurers are very complex as well, by international standards, and often still based on paper claims.

It is safe to assume that there were many sources of the unusually high rate of cost growth during the 1980s. But what I find most intriguing about Millman’s post is that it complicates familiar narratives over the relative virtues of the U.S. health system and those in Canada and Europe.

Reihan Salam — Reihan Salam is executive editor of National Review and a National Review Institute policy fellow.

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