The Corner

Health Costs and the Budget

Having been away last week and part of this one, I’ve been catching up on my favorite blogs, and this now–almost ancient post by Jonathan Chait seems worth a word (with apologies in advance for a long post).

Chait is a sharp and often knowledgeable commentator, I’ve learned a lot from him, but in this case he evinces what strikes me as a significant and common misreading of some important trends.

I’ll freely admit that his post first caught my eye because part of it is a rather bizarre critique of my own work. Chait, for instance, accuses me of arguing that our current fiscal difficulties are a function of a debt crisis even as he quotes me saying the opposite. He argues I support austerity by citing an essay in which I argue against it. He accuses me of urging Republicans away from “half-measures” and compromise because I opposed the particular counterproductive price controls the president has proposed for Medicare — but I’ve often argued in praise of half measures, including on Medicare in particular, just not in favor of worsening a bad situation.

But none of that is your problem. The problem is Chait’s larger argument: that the concerns of those of us who urge policy reforms to avoid a federal fiscal catastrophe have been proven wrong by recent developments — that, as his title puts it, “the facts are in and Paul Ryan is wrong.”

His first point on that front assumes that what Paul Ryan or I or others on the right argue for is a version of European austerity, which it plainly isn’t, and that conservative fiscal worries were based on the particular finding of a particular paper by two Harvard economists that has been shown to have had some data errors. That latter notion is surely among the more curious liberal hallucinations of the past few years.

But Chait’s more serious point is that the burden of health costs, which I at least do take to be central to the fiscal prospects of the federal government, is dramatically abating, and therefore that the projections on which the worriers base their worries are wrong. In fact, he seems to have taken this point to be so powerful and important that he repeated it a few days later in an attack on the Wall Street Journal’s long-running critique of Obamacare.

In describing recent trends in health costs in both posts, Chait repeatedly refers and links to this New York Times article, which discussed some of the trends and their possible causes and implications. The narrative he takes from that story is that conservative worries expressed in the early Obama years were based on assumptions developed at a time when health costs seemed to be soaring, but that we now know that cost inflation has been slowing since 2009, not just because of the recession, and it looks like the slowdown could persist — perhaps in part because of Obamacare.

The core of the problem with this tale is probably the fault of how the Times story itself lays out the matter. It describes the basic recent trends this way:

Between 2009 and 2011, total health spending grew at the lowest annual pace in the last five decades, at just 3.9 percent a year, although rising out-of-pocket costs have hit millions of families. In contrast, between 2000 and 2007, those annual growth figures ranged between 6.2 and 9.7 percent, according to government figures.

Here are the figures from which the Times draws its description — the official HHS figures for year-over-year health cost inflation from 2000 to 2011:

One way to describe this trend is to say, as the Times does, that health inflation ranged from 6.2 percent to 9.7 percent between 2000 and 2007 and was at 3.9 percent from 2009 to 2011. Another is to say that a major slowdown in cost inflation began in 2003 and ended in (or at least appears to have paused since) 2009. It had not reversed as of 2011, and that’s very important. That’s what the discussion about the effects of the recession and various other factors in the Obama years is about. But it’s not about the original cause of the slowdown, which began in dramatic fashion five years before the recession.

That’s part of what makes the role of Obamacare in the Chait narrative so odd. If we have to attribute the deceleration of cost growth to a federal law, the most plausible candidate given this data would seem to be the Medicare Modernization Act of 2003, which enabled a vast expansion of catastrophic-coverage insurance with health savings accounts and created a premium-support system to provide prescription drugs in Medicare. And indeed, the Times story suggests that greater consumer cost-sharing has played a part, and the Congressional Budget Office, in explaining its recent downward re-estimate of near-term Medicare costs, noted that “the largest downward revision in the current baseline is for spending for Medicare’s Part D (prescription drugs).” As a former Bush White House health staffer, I’d love to make that argument, but I’m sure the story is not nearly so simple or convenient. But the case for Obamacare playing a role in slowing cost growth is far, far harder to justify. Was it already working its magic on expectations a decade ago? Did it bring the slowdown to an end? Prevent a reversal? Isn’t none of the above the most likely answer given the data we have, not to mention the fact that the law doesn’t really take effect until next year?

It should be noted, too, that the slowing trend of the Bush years is part of a longer-term slowdown that has been going on, with a few significant reversals, since the impossibly large annual growth figures of the early 1980s. Here’s annual growth in national health expenditures since 1980, from HHS:

It’s not particularly clear to me what Chait’s kind of analysis wants to make of this pattern, especially as it relates to the federal budget, which is the point he’s trying to argue. After all, the nature of federal health spending (and the relation between annual growth and overall scope) means that while this has been going on with annual health-spending growth, the pattern of federal health spending in relation to the economy has looked like this:

I’m not actually suggesting that juxtaposing these two charts makes any point in particular. I’m just suggesting that it means Chait’s use of the former data to make a point about the latter doesn’t really make sense. The very high rates of growth in the early period of the first chart means that you’re growing a much larger pie in the latter period of that chart, which means that in order to make the growth of health costs sustainable you need a dramatic efficiency improvement in health financing combined with stronger economic growth. That’s roughly what conservatives are arguing for, and we think that if you don’t have that then the federal government will be in very serious fiscal trouble. Nothing about the facts of the past few years suggests otherwise, and nothing about Obamacare suggests it can achieve these goals — quite the contrary.

Chait’s argument seems to imply that the sorts of CBO projections we worry about were made in the midst of a cost explosion and assumed it would go on forever. But they were made in the midst of a dramatic slowdown in health inflation and made what seem to have been quite sensible assumptions about the trajectory of health spending. The Obama administration has made rosier but not fundamentally different assumptions. HHS expects annual health-spending inflation to average 6.1 percent over the next decade; it has averaged 5.9 percent over the last decade. I think their projection is on the low side, particularly because it vastly understates Medicare spending (the latest projection report deadpans its expectation of a gargantuan “scheduled 30.9-percent physician payment rate reduction mandated under the Sustainable Growth Rate Formula” which obviously has no chance of happening) and because it understates the inflationary effects of Obamacare. But whether I’m right or the administration is, or CBO, or the scholars cited in the Times, Chait’s story doesn’t hold up — especially as a case for doing nothing about health-entitlement costs.

And that, in the end, is what his argument is all about. He wants to suggest that conservative arguments for fundamental health-care and entitlement reform are based on the notion that costs are now exploding and that if they aren’t then those arguments fall apart. But no one argues the peak of the crisis is already here. The point is that it’s coming, and we ought to do what we can in advance. Chait doesn’t even really try to argue against that point. Like the liberal fiscal deniers more generally, he says we shouldn’t think about any of this now and implies that maybe we should sometime later when a huge crisis is right upon us, though it’s far from clear what kind of action he would find acceptable even then. This is one irony of our entitlement debate: the two sides disagree less than you might think, they’re just talking about different things. The Left, in essence, says we don’t need to do anything right now so we need not worry, while the Right says we’re eventually going to have to do something so we might as well figure out what. The difference between them is about whether it makes sense to prepare for the future.

The aging of our society, combined with the character of Obamacare, offer some strong reasons to expect that health-spending growth will begin to rise again in the near term and in any case that (because of the demographic facts especially) in the decade after this one we will confront an immense and unprecedented entitlement funding challenge. Medicare, in particular, requires fundamental reform to be made sustainable. And the most recent relative slowdown of costs in that program suggests a path for such reform. The prescription drug program most responsible for CBO’s mildly improving outlook on Medicare spending is a premium support plan of exactly the sort that the House Republican budget proposes for the larger program. And the economic logic behind it is of exactly the sort that is behind some of the key conservative alternatives to Obamacare.

Those reforms could help constrain both national health spending and federal health spending, and they would be very good for growth, without shirking the government’s obligation to the needy and the elderly. That’s the difficult combination we need, and every passing year of denial and distortion makes it more difficult to achieve such reforms without major disruptions in the lives of vulnerable people.

Maybe the growth of health costs will start slowing again. Maybe Obamacare will not significantly increase it. Maybe Medicare will somehow be fine. Maybe. The facts are not in, but the prospects don’t look good.

Yuval Levin is the director of social, cultural, and constitutional studies at the American Enterprise Institute and the editor of National Affairs.


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