Reasons to worry.

Obamacare Isn't What's Slowing Costs

Megan McArdle is a Bloomberg View columnist. She wrote for the Daily Beast, Newsweek, the Atlantic and the Economist and founded the blog Asymmetrical Information. She is the author of "“The Up Side of Down: Why Failing Well Is the Key to Success.”
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Health-care cost growth is slowing, and the Congressional Budget Office expects this to continue. Is this good news?

To many people, that question may seem crazy. Every other week seems to bring another lurid graph showing that if you project out health-care costs for the next 40 years, 100 percent of our income will be devoted to hip implants and cardiac stents. What's not to like about slower growth in a major expenditure?

Well, much depends on why it's slowing. If health-care cost growth is slowing down because we're working a lot of inefficiency out of the system, then the slowdown is obviously a big win for everyone except health-care providers and their shareholders. This explanation is a big favorite with the Barack Obama administration, which likes to credit the Affordable Care Act and related policies for the slowdown.

But health-care cost growth might be slowing down for other reasons. Innovation might be slowing down, in which case we've got good news and bad news. The good news is that we'll be spending less on health care in the future. The bad news is that we won't be getting so much in the way of new treatments.

Or the slowdown in cost growth might reflect broader growth trends in the economy. In that case, I've mostly got bad news: Health-care cost growth will be slower in the future. But so will economic growth. Health-care spending will be lower in the future, but so will revenue, meaning that we'll be poorer -- and we'll still have a problem with the budget deficit. So this is pretty much lose-lose.

Which of these three things is the case?

Well, I think we can be pretty sure that public policy is not making the system more efficient, for two reasons. First, the decline started in the middle of the last decade, and there's no plausible policy mechanism that would have caused cost growth to moderate just then. And second, the same broad trend shows up in pretty much every high-income country. No matter how smashing you think Obamacare was, it didn't stabilize health-care spending in Switzerland.

It could be a matter of better practices in the industry. One piece of evidence for this: The cost growth seems to decline most steeply in English-speaking countries, which could reflect some sort of information dissemination.

And yet, I'm skeptical. Health care is not a competitive industry the way automobiles are. The British, Canadian and American systems do not much compete for patients; moreover, each is organized so differently that it's hard to imagine all of them implementing the same productivity-enhancing measures at the same time.

Industrial diffusion is simply inherently slower than the trends we seem to be seeing -- it's not as if Toyota invents just-in-time production, and two weeks later, it's in every factory at General Motors. This has to be especially true in health care, where competitive pressures are limited and heavy government involvement makes major change into a ponderous process.

Technological decline seems more plausible; see this Brookings Institution paper for the extended argument. Basically, health-care innovation is expensive, and for roughly the last decade, we've been doing less of it. As old innovations come off patent or are refined into cheaper and better versions, costs fall.

If you think health-care innovation is all useless me-too drugs, you should be pleased that we're getting less of it. As it happens, I don't think that's the case, so while I'm pleased about the budget impact, I'm less pleased at the prospect of fewer new medical technologies. The good and the bad news is that the authors of that Brookings paper don't necessarily expect the experience of the last decade to be continued in the future -- good, because "whee, new treatments!" And bad, because, well, money.

The most worrying possibility is that this reflects a broader slowdown in how fast everything can grow. Certainly, it's clear that the Great Recession caused a major slowdown in health-care costs everywhere; if you graph the data from the Organization for Economic Cooperation and Development, there's a sharp, across-the-board inflection point in 2009.

Opponents of this theory argue that the slowdown also shows up in Medicare and Medicaid, and is therefore less likely to be driven by the economy. I'm not so sure. During economic downturns, states clamp down on Medicaid reimbursements, and seniors get more worried about the price of co-pays and supplemental insurance because they're at best imperfectly insulated from economic problems.

Over the long term, there's only one way to find out if this is great news, and that's to wait and see what happens -- to our budgets and to our health. In the meantime, I'm afraid that the happiest stories also look the least likely to me.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Megan McArdle at mmcardle3@bloomberg.net

To contact the editor on this story:
James Gibney at jgibney5@bloomberg.net