Democrats say it will be hard to push a reform bill through Congress unless it reduces projected spending on health care and begins to bring the federal debt under control…
“It's not good enough that it's just paid for; it actually has to start driving long-term costs down,” said Sen. Mark Warner (D-Va.), one of nine freshman Democrats who last month urged Senate leaders to pay more attention to controlling federal health spending in this era of “exploding debt and deficits.”
This latest assessment reflects the notion that credible health care reform legislation will need to address the chronic situation at which national health expenditures have been rising faster than nominal GDP.
To take a closer look at the excess of growth in national health expenditures and nominal economic growth, from 2000 through 2008 national health expenditures increased from $1.353 trillion to $2.379 trillion. That is an average increase of 7.3% per year. During that same period, nominal GDP rose at an average rate of 5.3% per year. Had national health expenditures grown at the rate the economy grew, national health expenditures would have been $327 billion less than they were in 2008. Cumulative savings from 2000 through 2008 would have amounted to $1.735 trillion.
Looking ahead, the 2008 Annual Report of the Medicare Trustees projected that nominal GDP would expand at an annual rate of 4.9% from 2008 through 2018. In contrast, according to the Centers for Medicare and Medicaid Services forecast that national health expenditures would increase by an average of 6.2% per year. If those predictions play out, national health expenditures would be running $530 billion more in 2018 than if they increased at the rate the economy grew. Were national health expenditures to grow at the rate of nominal GDP during that timeframe, cumulative savings would amount to $1.719 trillion.
One of the major problems confronting policy makers is the absence of health care industry productivity data. Although the Bureau of Labor Statistics provides labor and output productivity for a large number of industries, that data does not include health services. In the absence of such data, it is difficult for policy makers to gain a good understanding of the root of the health expenditures imbalance.
To gain a crude approximation, one must:
• Identify the share of increased expenditures that is due to medical price inflation.
• Identify the share of increased expenditures that is associated with the changing age structure of the U.S. population. In general, older persons have higher per capita health expenditures.
• Identify the share of increased expenditures that is associated with changes in utilization. Increased average consumption of health services boosts national health expenditures.
Once those tasks are completed, it can be assumed that the remaining increase in expenditures results from value added. That is a generous assumption, as myriad inefficiencies could explain at least part of the remaining increase in national health expenditures.
In any case, the 2000-2008 data reveals that the largest share of increased national health expenditures can be attributed to medical price inflation. The smallest share can be attributed to value added.
Overall, from 2000-2008, value added increased at an average of 1.2% per year. During that same period, the nonfarm business sector enjoyed average annual productivity growth of 2.5%. Productivity in the manufacturing sector increased 3.3% per year. As a result, the rough approximation of health industry value added hints that abnormally low productivity could be playing a role in helping drive medical price inflation.
If, in fact, that is the case, policy makers will need to consider provisions in the health reform legislation that would:
• Increase industry competition. Increasing industry competition would entail examining trade barriers that preclude greater competition from abroad, price protections that preserve arbitrage situations in pharmaceutical prices, and state-based regulatory barriers that limit competition.
• Improved education. Over time, improved medical education and training can lead to better outcomes.
• Encourage investment in technology and improved facility management practices. Technology and improved management can reduce inefficiencies over time.
• Address procurement practices. In general, when emerging technologies are purchased in their infancy, the cost-benefit ratio of such technologies is lower than when such technologies have evolved and advanced. Better procurement would take into consider cost curves associated with changing/emerging technologies.
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