Bin Appelbaum has an interesting piece on the impact of recent developments in the health care sector on the macro economy. It is widely agreed that the sector is bloated with inefficiencies, often characterized by extremely high costs for the same products and treatments that cost much less elsewhere in the world. Scolds, including myself, endlessly point out that other countries spend half to two-thirds what we do per-capita, covering far more of their citizens, and with comparable or better outcomes.
Appelbaum argues that achieving these efficiencies in a recession—or slow slog out of a recession—kinda gets the timing wrong. You want to slim the sector for good economic reasons, but is this the right time for health care to go on a diet?
For example, the piece points out slower growth in health care employment of late is one reason we’ve seen weaker jobs reports over the past few months. The figure below shows yearly percent changes in health care jobs wherein you can see the recent deceleration at the very end of the series.
On the other hand, it’s easy to overplay this. The next figure plots health care jobs against total employment (minus health care). Health care demand surely has a cyclical component, say regarding elective procedures, but it’s also got a significant inelastic component, as patients typically don’t wait for the macroeconomy to improve before seeking needed treatment, especially those with coverage. At any rate, excepting the last couple of months, the sector has clearly been a stalwart job creator throughout the recovery.
But the point I wanted to stress has to do with the role of health care costs in the macroeconomy in boom versus slog times because I think they demonstrate an important difference in the economic dynamics.
In the 1990s, there was a very significant shift in the health insurance industry away from fee-for-service to bundled payments, through HMO’s and similar provider arrangements. The figure below shows one dimension of the impact of prices, in this case on the growth of employers’ health costs. Note that even as the economy was moving towards full employment in the mid-1990s, the growth in the health part of compensation costs hit zero.
Alas, as the figure reveals (see red line), the savings of the 1990s turned out to be more one-time than lasting. The inefficiencies embedded within the delivery system soon kicked back in and costs were again growing well ahead of overall growth (implying health spending growing as a share of GDP). But back in the 1990s, it was quite widely agreed upon that the slowdown of health costs was an important contributor to full employment.
Employers faced increasing demand and—due to the shift away for fee-for-service—lower all-in compensation costs, and the collision of these two was recognized by many economists as one reason hiring boomed and unemployment fell to 4% by 2000. So, unlike the focus of the NYT piece, here we have a case where slowing costs were clearly very helpful to the near-term economy.
[BTW, economists were also scratching heads back then because the theory is that any decrease in health costs should just show up in higher wages and thus should decidedly not lower the cost of hiring and boost labor demand. I’ve never thought that tradeoff is as etched in stone as is commonly assumed, and certainly not in the near term.]
To me, this is a microcosm of a larger point. As Keynes pointed out long ago, in recessions, lower labor costs don’t drive more hiring because the missing ingredient is overall demand. “Downward wage flexibility,” touted by conservatives to this day as a solution to our hiring problems, would just make things worse, as lower wages (and lower prices) dampen demand further, an observation more in the spirit of the NYT analysis. But in bona fide growth periods, a shock like the one in mid-90s health costs can lower the cost of hiring at a time when firms are facing strong demand for their products or services, and that can lead to a lot more jobs.