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Post hoc health care economics

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Fred sneezes at the exact same time as the earthquake occurs; therefore Fred’s sneeze caused the earthquake. That is an example of a completely implausible post hoc argument. More insidious versions of the “ad hoc art form” often contain a grain of truth, yet they too are ultimately false arguments. Such is all too often the case in Health Care Cost Land (and its two sectors — Public and Private) where early reports of a decrease in the growth of health care spending provide only a small part of the whole story.

Certain portions of the media and the blogosphere were giddy in mid-September when a Kaiser survey indicated that the cost of employer health coverage showed “muted growth.” They cited data that growth this year was a mere 3 percent. Drew Altman, chief executive of the Kaiser Family Foundation said, “We’re in a period of historic moderation in premium costs.”

Where to begin? Let’s start with a statement every benefit advisor has made to every client forever: Premium is different from cost. To the average American, lower premiums are great until they use their plan and realize that their up-front financial responsibility is much greater than they are used to. This year there is a great deal of lag in the overall financial picture, since many newly-insured individuals got coverage in March. Some did not receive their insurance cards until May. Real numbers won’t reflect those facts until later in the year. Overall spending — a much better metric than premium costs — paints a different picture. According to the Centers for Medicare & Medicaid Services, health care spending will grow at 5.6 percent this year. Yet even that view does not paint the bigger picture. In the 1960s health care spending was approximately 6 percent of GDP. Today that same spend is more than 17 percent of GDP. 

Many factors have driven that increase. Foremost among them are the twin entitlements of Medicare and Medicaid. Life expectancy and expensive treatments have also fueled the rise. Before PPACA, federal and state governments already accounted for more than half of all health care spending and the post-PPACA realities will only exacerbate the increase.

What does this mean in terms of the manic depressive nature of short-term reports about spend, cost and the like? It means that they are meaningless over the medium and long term.

For readers who believe that PPACA was not economic policy, I refer you to a startling and revealing new book by Professor Casey Mulligan of the University of Chicago, “Side Effects: The Economic Consequences of Health Reform.” Casey contends, “Whether the Affordable Care Act lives up to its name depends on how, or whether, you consider its consequences for the wider economy.” A part of his thesis is that as PPACA gives a bigger piece of the economic pie to certain populations, it insidiously diminishes the pie itself and reduces overall productivity.

Professor Mulligan points to additional drags that PPACA will place on the economy. As the employer penalty looms large, in some quarters it becomes a de facto penalty for hiring and expanding businesses. Because of the 30-hour full-time equivalence rule in PPACA, many employers have adopted 29-hour work schedules, which harms productivity.

He estimates that “ACA’s long-term impact will include about 3 percent less weekly employment, 3 percent fewer aggregate work hours, 2 percent less GDP and 2 percent less labor income, all of which will be visible by 2017, if not before.” His conclusion is that people who aren’t receiving assistance through PPACA are paying twice for the law: once as the total economic pie gets smaller and again as they receive a smaller piece.

Economics seldom makes for sexy headlines, but those who tout the favorable statistic du jour would do well to take a longer and broader view of the effects PPACA will have on the economy writ large. Unless Fred sneezes again — then, we are doomed.

See also: Towers of innovation?


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