My e-mail on health care spending

To: aaron@mdcarroll.com [Ed. note: writing as The Incidental Economist]

Re: Health care spending series

Absolutely brilliant series about health care costs. I will be promoting it in my humble blog.
I write frequently about health care from an insurance/actuarial point of view and I always try to make a couple of points:

  1. No one party, as you note, is responsible. It’s the big pie problem. When you have 30 years of above-average inflation, the pie gets really big. As the pie grows, more and more people figure out a way to carve off a sliver for themselves. This of course makes the pie grow even bigger, creating a spiral problem.
  2. The problem, at its core, is that for the past 30 years, we have had health care inflation 2-4 percentage points above the CPI. Now we’ve grown used to that high inflation. To solve the problem, we have to beat down the inflation expectations.
  3. Health care reform attempts to do this and relies heavily on insurance companies to negotiate down rates for hospitals and salaries for doctors. At the same time, health insurers constitute one of the few groups that Obama regularly bashes for high health costs. It will be difficult for insurers to wield the cost-cutting stick while being portrayed by the current administration as the villain.
  4. Any solutions to the health care problem will take decades to succeed. Right now we spend 16% of GDP on health care while the typical OECD country spends about half that. Were we to overnight reduce our spending to the OECD average, we would be lopping 8% off U.S. GDP. This would precipitate a recession that would make us long for the good old days of 2009. So we will have to slowly squeeze all of the elements you cite to get health care spending down to a reasonable level.
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