Health Care Spending, Real and Otherwise

June 26th, 2014 at 10:21 pm

Using imprecise language, I managed to confuse some folks in my discussion of that lame GDP report from the other day.  I wrote:

As more people get insurance coverage and treatment, this will show up as more spending and higher GDP.  At the same time, cost controls, which have initially been found to be quite effective, push the other way.

Sentence one, fine.  Sentence two, confusing, because it sounds like I’m just saying something about slower growing prices when the issue is real, i.e., price-adjusted, GDP.  What I had in mind was real utilization of health care, as shown in the figure below, which feeds right into GDP through consumer spending.  As you can see it was a big negative in the quarter, but you can also see what an outlier it was.


Source: White House CEA

The point of the excerpted sentences is that while greater coverage will bring more people into the health care system, other reforms to health care delivery—ones that favor quality over quantity—are targeted at reducing wasteful utilization (see this discussion of examples of these reforms and their impact on spending).

Some of these reforms will, in fact, mean less real GDP.  For example, working with discharged patients to improve their aftercare appears to be significantly reducing hospital readmission rates (see figure in above link).  Since aftercare is cheaper than a hospital readmission this means less real spending and less GDP (though one could argue that this is an artifact of GDP measurement, which doesn’t distinguish between wasteful and efficient spending).

This reminds me a bit of the dustup we had a few months ago over CBO’s finding that the provision of premium subsidies will unlock the job lock of some workers, enabling them to work less and still maintain coverage.  This too will reduce GDP against a no-premium-support counterfactual.

But in both this and the readmissions’ case, these folks are notably better off.  Therefore, to oppose such reforms because they lower GDP suggests a bit of a fetishistic relationship with this big aggregate called GDP.  And this being a family blog, we cannot entertain such fetishes.

[Note: if you want to learn a lot more about all of the above--delivery reforms, the role of IT, the search for quality over quantity—and learn it in a way that goes down extremely easy and is even fun and hopeful, read David Cutler’s The Quality Cure.  Yes, he’s a health care economist, but he starts Chapter 3 by asserting “Economists are foolish…” which suggests his PhD has not lobotomized his common sense.  If you’re at all interested in this material, you’ll thank me for this recommendation.]

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6 comments in reply to "Health Care Spending, Real and Otherwise"

  1. Larry Signor says:

    “This too will reduce GDP against a no-premium-support counterfactual.”…Only if we conclude such quality savings just disappear down the rabbit hole. With an over-leveraged consumer, healthcare savings will find another home and GDP should not be impacted beyond a marginal level.

  2. Robert Buttons says:

    Talking against aggregates? Yet another example of how I am turning JB into an Austrian!! Now if you can get that fetishist at the NYT to stop advocating GDP boosting alien invasion preparation as a solution to our malaise.

    • Jared Bernstein says:

      Maybe you’re just saying that because you’re the vanguard of the alien invasion!!

      • Robert Buttons says:

        Austrian Economics is a lot like findings aliens. Practiced by the tinfoil hat, govt skeptical loony fringe.

        But quantum mechanics, too, once seemed loony, until it was proven (It still seems loony to below average intellects, like mine). Woulda thought the housing crash was the Einstein moment to wake up mainstream economists, instead they doubled down. After all, science is about making predictions: “Ironically, by transferring the risk of a widespread mortgage default [through GSE's, FHA, etc], the government increases the likelihood of a painful crash in the housing market. “–Ron Paul, 2002.

        But we are living in a great era for economic science. We are living through a massive, global monetary experiment. I am willing to posit any other outcome better than catastrophic disproves the Austrians. That should be an easy bet to take.

  3. dwb says:

    well, sort of. In MD for example, a bunch of people now are on Medicare, but that’s just a license to hunt for a doctor, and a number of clinics have shuttered. If people use ERs more, because they can, that puts pressure on capacity.

    It’s about both quantity and quality (productivity). For costs to go down, there needs to me more supply (which could come in the form of productivity, or flat out more doctors). The whole system is designed to constrict supply. It starts in college when professors will flat out tell you they curve organic chemistry to weed people out, because they only want to graduate #x pre-meds. Does one really need to know the Fischer-Tropsch reaction to be a doctor? Doctors that come here from other countries have a hard time getting credentialed. Hospitals are consolidating in metro areas, making them de-facto local monopolies. Are rent seeking local monopolies on health care good for health care delivery? Doubt it.

    Costs will go down when doctors have more free time, more are unemployed, and hospitals compete more.

    As for the impact on GDP, the correct answer is “it depends” because there are so many countervailing forces, and we do not know the magnitude of them.

    Overall though, my gut is that increases in productivity and increases in supply *rarely* decrease GDP. A new app or tool (for example) that improves diagnostics may make doctors more productive, improve hospital readmission, and may decrease health care spending (or its rate of growth).. that’s true. But there are offsets in other areas: Doctors take vacations, hospitals spend $ on IT; consumers spend less on health care & insurance spend more on other stuff, etc. When one good gets cheaper, people reallocate their budget.

    Can we think of a single case where productivity decreased GDP? No. And, even if it does, higher productivity means more free time to go fishing. More free time is always welfare increasing.

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