Infographic: How We Spend Our GDP

Today's Managing Health Care Costs Indicator is 13%

This month's Atlantic Monthly has two interesting infographics about how we spend our GDP in the United States.  We spent 4.8% on health care in 1947, 8.1% in 1967, and it's up to 18% as of 2007.  It's also striking how much less of the GDP we spent in 2007 on government services. In fairness, this has gone up through the Great Recession with increases in government services for those who faced financial hardship.

This doesn't all represent 'crowd out.'  Far fewer Americans grow or process food - so no surprise we're spending less on this.  The decrease in percentage of GDP going to education is especially scary, though. 

Click image to enlarge.  Source

Click image to enlarge.  Source 

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Health Care Adds Jobs

Today’s Managing Health Care Costs Indicator is 26.8%

The Bureau of Labor Statistics reported that health care added 31,300 jobs in July – over a quarter of the new jobs added in the US.

The underlying problem is likely that we aren’t adding enough jobs in the rest of the economy.  There are good reasons why we might be adding more jobs in health care than elsewhere – as our population ages. 

Still, this is a great illustration of our mixed emotions about the cost of health care.  As long as health care is adding 26.8%  the new jobs in our economy , the cost of health care will continue to grow at a faster rate than the overall economy.

We can’t celebrate health care job growth at the same time we complain of increasing health care costs.  Earlier post on this topic. 

A brief personal note.  The Pan Mass Challenge was a great ride this past weekend – about 190 miles cycling from Sturbridge to Provincetown, and about $30 million raised for cancer research.   I had three flat tires, and the sky sprinkled us a bit –but the rain held out until after we reached the end of the ride.  A few hundred of the ~5000 riders were cancer survivors, and cancer has touched all of our lives.  I spend a lot of my time most weeks thinking about how to make health care cost a bit less.  From my saddle, I spent this past weekend thinking about how we have to invest more in research so that more people who are afflicted with cancer can live long, normal, healthy lives.  

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Health Cost Increases Down

Today’s Managing Health Care Costs Indicator is 1.39

The Wall Street Journal calls growth in health care expenditures “sluggish,” and the Boston Globe  and others  report on multiple hospital layoffs and threatened closings.  The head of the Mass Taxpayer’s Alliance pointed out that health care expenditure growth is way down in Massachusetts – and cautions against overly-aggressive new cost control measures that could threaten the state’s medical, biotech, and pharma segments.

Sounds like we should be declaring victory.

But not so fast. 

There is growing evidence that health care growth is tightly correlated with GDP growth.   As a country becomes richer, its health care costs go up.  In the US, the correlation is 1.39. This means that health care costs have increased exponentially by a factor of 10^1.39 consistently, whether health care costs increases appeared out of control or restrained.  

The corollary is that when a country stagnates, health care growth lags.  Further, when a country frankly loses wealth, health care spending can collapse.

Austin Frakt has pointed to new research showing the correlation between wealth changes and health care cost changes in the US.  Dylan Matthews, who blogs with Ezra Klein at the Washington Post, has posted a series of correlations for different countries   that show that the correlation between health care cost increases and increasing GDP (or aggregate national wealth) appears to hold everywhere it is studied.  Rates of health care cost increases vary – but the correlation does not.

What this means to me is that we should not assume that the current slowing of health care cost increases means that we’ve come up with the right approach to controlling health care costs.  When (if?) growth returns to the economy, we’ll likely see an uptick in health care cost inflation absent new efforts at health care cost containment.  Efforts to constrain health care cost increases are clearly swimming against a powerful economic current of tight association between GDP increase and health care cost increases. 

Frakt suggests we should focus our efforts on getting better quality or quantity of life from health care, since cost increases appear almost inexorable.

I believe we need to keep seeking approaches, whether they are in public health, provider payment, network contracting, or medical management, to be sure we’re purchasing better value in health care.  Perhaps I'm an optimist - but I think the correlation number might have been higher than 1.39 if there weren't so many impressive if imperfect efforts to 'bend the cost curve.'  We should also continue to seek cost savings when the economy is rocky, as demand for elective care is lower, and extra capacity can lead to lower unit prices.  The imperative to control health care inflation will increase when the economy is on the mend.

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Hans Rosling's 200 Countries, 200 Years, 4 Minutes

This is a fascinating video from the BBC with a statistician showing increasing wealth and life expectancy by country from 1810 to 2009.  The visualization is excellent - and the impact of the WWII and the swine flu epidemic is impressive. More impressive (and not commented upon) is the fall in life expectancy in China associated with the Great Leap Forward in the  late 1950s.

What does this have to do with health care costs?  The places where health care is most expensive just so happen to be those with the highest GDP -and in general they have the longest life expectancy.   Increasing wealth is enormously important to improved health - all the more reason we should manage our economies for robust growth.  When health care costs end up being so high that they are a major impediment to growth, that can actually lower health!

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PWC Estimates 9% Health Care Cost Increase in 2011

Price Waterhouse Cooper  published its projections for health care inflation in 2011 last week.  PWC projects that medical costs will rise by 9.0% - better than the 9.5% from 2010 – but certainly not a game changer. Further, since inflation is likely to remain low or nonexistent and the GDP is likely to be close to flat, the portion of GDP dedicated to health care will continue to increase.

PWC suggests that the factors that are pushing health care costs down include:

-          Move to generic medications

o        Lipitor goes generic in 2011. Note that the huge cost savings are generally 18 months after the first generic comes out; but there are some savings even in year one

-          Increasing patient cost-share

o        This increases price sensitivity, and decreases demand. Above is a summary of the PWC survey on increased cost-shifting to members/patients

-          End to COBRA subsidies.

o        Members who have recently lost their jobs tend to have very high claims costs, and the much higher unemployment coulpled with the federal subsidy of 2/3 of the cost of COBRA has swollen the number of people on this program.

The factors pushing health care costs up include:

-          Medicare cost-shift.

o        Medicare underpays hospitals and other providers less than commercial, employer-sponsored plans (although not as badly as it would if the 21% physician fee schedule decrease had not just been reversed for another six months by Congress.)  The PPACA (health care reform) decreases rate of increase for hospital fees – so the relative underpayment will increase.  While Medicare rates are still substantially higher than payment rates in other countries, they are almost always below

-          Provider consolidation.  

o        Hospitals are merging, and they are acquiring physician practices.   There’s been a dramatic shift of cardiologists from private practice to hospital employment over the past year with reimbursement changes, for example.  Larger provider groups mean less competition and higher prices

-          Health Care Information Technology

o        PWC notes that the largest expenses for implementing Healthcare IT are front-loaded in 2011 and 2012 – and suggests that the savings will accrue later.

o        The New York Times http://www.nytimes.com/2010/06/27/business/27digi.html?hpw had an article today suggesting that EMRs can allow faster physician bill transmission, which can lead to quicker adjudication (payment), and lower administrative costs.  

o        It’s also possible that EMRs will lead to better charge capture, which can increase health care costs as long as we stay in a system of fee for service reimbursement.

All told, the PWC estimate of health care cost increase is especially distressing in light of the sour economy.  

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Council of Economic Advisors: Economic Growth is Dependent on Controlling Health Care Costs

Anyone who doubts the importance of controlling health care costs should look at the graphs in the report from the Council of Economic Advisors.  Economists generally agree that a major reason that family income has been stagnant for decades in the face of higher worker productivity is that the extra dollars have gone into into health care.  The Council estimates that health care reform will produce higher growth (as much as 4% increase in GDP by 2030) by freeing up resources for other investment, decreasing workforce disability, and lower government and employer insurance costs.  This will lead to higher family income as well as lower federal deficits.

Wednesday addendum: David Leonhardt of the NY Times weighs in, noting that the "insurance lock" of the current system contributes to what he calls our "innovation deficit," where 1.5 million don't change jobs because they don't want to jeopardize their current insurance.

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