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Spending More on Health Care Is Actually Sort of Good

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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In recent years, health care cost growth has slowed down. This is great news for the federal budget, and for those of us who, you know, get health care occasionally. Unfortunately, researchers from the Centers for Medicare and Medicaid Services project that the good news may be over. With the population aging, the economy recovering, and Obamacare expanding coverage, they expect health care cost growth to average almost 6 percent over the next decade.

That's not all bad news. The population is aging because people are living longer. And economic recovery will give us more income to pay our higher health care costs. The newly insured are presumably pretty happy about it too. So there's no reason to go into paroxysms of mourning over this news. However, it does cast light on a debate that has been going on for some time: why growth in health expenditures has gone down.

Supporters of Obamacare think they have an answer: Obama! In this narrative, President Obama came into office, the government did a lot of good stuff with health care regulation, and finally, after long years, costs began to fall.

This was never a particularly plausible narrative, because costs began falling during the Bush administration. They fell a lot in 2008, floated around between 3.5 percent and 4 percent from 2009 onward -- and according to CMS, will now start rising back toward 6 percent for the next 10 years. To believe that Obama caused the drop, you have to believe that Obamacare and other administration initiatives are so amazing that they made health care costs fall dramatically before Obama was even elected, and rise as Obamacare took full effect. That would be ... weird.

So why did costs fall? The best explanations I've seen rely on two factors: the economic slowdown from the financial crisis, and a decline in the rate of technological innovation. Doctors just don't have that much great new stuff to do, and when we were all poorer, we couldn't afford to pay them to do it anyway. So health care cost growth fell. 

Astute readers will have picked up something of a paradox: Good things make health care costs rise faster, and bad things make them rise slower. But actually, that's not much of a paradox -- at least as long as you think that more health care makes people healthier. If that's the case, then an increase is pretty good news; it means that we've found some new way to make people better. Of course, if you don't think this, then we should be displeased when costs rise, because that just means that we're wasting a lot more money. Some of those same astute readers will also note that this rather undercuts the urgency of expanding health insurance coverage.

CMS seems to be betting that health care is a good thing -- and that as we live longer, and get richer, we'll want more of it. That will be hard on the federal budget. But it will be easier on people who get sick. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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

To contact the editor on this story:
Philip Gray at philipgray@bloomberg.net