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.