Slowing Health Costs, Budgets, and Jobs

February 15th, 2013 at 8:13 pm

There’s been a spate of interesting pieces over the past week on the deceleration in health care spending over the past few years (see here and here, e.g.).  The figure below, from GS Researchers, provide a useful, albeit cluttered, look at the evolution of the issue.  It shows CBO’s evolving 10-year projections of health spending as a share of GDP from 2001 to 2023.  As health spending grows faster than GDP, it has accounted for an increasingly larger share, and typically, subsequent forecasts are higher than their predecessors.

Source: Goldman Sachs, US Research

But if you look at the light and dark blue lines at the end of the figure showing predictions made in 2011 and 2013, you see the current projections are 0.7 percent of GDP lower than those made a few years ago.  And of course, when you’re dealing with such large magnitudes, small differences compound over time:

The estimates CBO just published, compared with estimates made two years earlier, show a cumulative reduction in projected Medicare, Medicaid, and ACA spending of nearly $800bn from 2014-2021, or probably around $1 trillion over 10 years. To put this in perspective, while Congress has been debating over the last two years how to reduce Medicare spending by a few hundred billion dollars–the President’s budget last year called for $300bn in Medicare cuts over 10 years, for example–changes in economic assumptions projections have reduced projected health spending by twice as much…

That’s most obviously relevant in terms of providing a bit of budgetary breathing room.  It doesn’t mean were done worrying about long-run pressures from health costs, but it certainly should stop us from slashing away at social insurance in general and Medicare in particular as we see how these trends evolve.

Certainly some of the savings are cyclical, as the recession has dampened effective demand for health care services (“effective” meaning people may want it, but are willing to put it off until they can better afford it).  But most experts—as in the second link above—think that a good chunk of the slowdown will stick, as it stems from new efficiencies in how health care is delivered, and such savings appear to have proceeded the downturn.

But what about beyond the budget?  Where else might slower growing health costs help us?  Well, for one, it could help on the jobs front.  The figure below looks at the relationship between two variables, job growth and real health spending per person in excess of real GDP per person.  The latter is often called the “excess cost burden” and is closely watched as an indicator of the extent to which health care spending is absorbing evermore of our GDP.

Sources: National Health Expenditures data, BEA, BLS

Economists, including myself, were struck by the negative correlation between these variables in the 1990s, when a sharp downshift in health spendng (from switching to managed care) seemed related to faster job growth.  Theoretically, this isn’t supposed to happen, since employers are thought to trade off employee health costs for their wages, dollar for dollar.

So theoretically, slowing health costs should have affected the composition of pay, not the quantity of jobs.  But good research found these trends to be inversely related in the 1990s (I suspect this is because the tradeoff isn’t actaully 1-for-1, at least not over the medium term).  At any rate, while there’s clearly a cyclical story in the figure, it’s an open question as to whether the health spending will stay low and if so, whether, along with relieving some budget pressures, that will help boost the rate of job and wage growth as the current expansion progresses.

Lord (Keynes) knows, we could use the boost.

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One comment in reply to "Slowing Health Costs, Budgets, and Jobs"

  1. Fred Donaldson says:

    Healthcare – complicated, determines where people work, what they can save, even if they can conceive.

    Some pundits have recently commented on other sites that the birth rate seems to be declining among middle class citizens.

    In my opinion this terrible trend is caused by economics – newly-minted healthcare insurance plans that no longer just require co-pays, but have a huge deductible.

    When a family has to pay the first $6,000 in healthcare costs in a year (the common plan today) – having a baby is suddenly a very expensive proposition, especially if you are below the median $32,000 a year income.

    It doesn’t hurt Medicaid pregnancies for the poor, which has no huge deductible, nor do the rich consider $6,000 much more than chump change.

    And if you don’t have a family healthcare plan – just a single plan – it doesn’t cover any costs of pregnancy.

    So, it is not just inequality of income that is threatening to destroy the middle class, it is the extreme costs of having a baby, even with insurance.