Why do the health economists keep getting it wrong?
For more than a decade, CMS and CBO consistently overestimated the growth in health care spending, which undermines efforts to spend more on health-related social needs
Earlier today, economists at the Centers for Medicare and Medicaid Services released their annual projection for health care spending over the next decade. After noting that spending fell to 17.4% of gross domestic product in 2022, which is about where it’s been for most of the past decade except during the Covid years, they predicted spending by Medicare, Medicaid, private insurance and other public and private entities would once again resume its upward trajectory this year and reach nearly 20% of GDP by 2031.
Hmmm. Where have I heard that before? I keep a file containing past CMS projections so it was fairly easy for me to check. The earliest article in my file dates from February 2008, when health care made up 16% of the overall economy. That year, CMS predicted spending would reach 20% of GDP by 2017.
Let’s go to the videotape. Seven years after President Obama and the Democratic Congress passed the the 2010 Affordable Care Act, which included numerous provisions aimed at reining in health care spending, it had only reached 17.7% of GDP.
The CMS prognosticators during the first year of the Trump administration didn’t do much better. In 2017, they predicted healthcare would reach nearly 20% of the economy by 2025. Now they’re saying it won’t reach that level until 2031.
To be fair, healthcare spending did spike to nearly 20% of GDP in 2020. But that was only because the pandemic dramatically slowed overall economic activity while the government poured cash into hospitals and physician offices to keep them running. It took only two years for it to fall back into the 17-18% of GDP range as the economy recovered and the stimulus was withdrawn.
One could conduct a similar exercise with healthcare spending projections from the Congressional Budget Office. Fortunately, I don’t have to do the calculations because Sen. Sheldon Whitehouse (D-RI), chairman of the Senate Budget Committee, asked CBO director Phillip Swagel that very question.
Swagel replied in a letter earlier this year that CBO overestimated mandatory spending for health care in the 2010–2020 period by 9%. “Most of the overestimate for the Medicaid and Medicaid programs stemmed from an overestimate of spending per beneficiary, not an overestimate of the number of beneficiaries,” he wrote.
This systematic overestimation of future health care costs by government economists has far-reaching consequences. When CMS gets it wrong, organizational planners around the country are given a faulty notion of how much money will be flowing through the system, which could lead to a misallocation of resources.
When CBO gets it wrong, Congresspersons get a faulty notion of what resources are available to spend on other programs. It also feeds the GOP’s hysteria around balancing the budget, which undermines political support for other social programs, including those that would actually improve the health of the nation.
Does greater spending on health matter?
I’m not saying we shouldn’t care how much of society’s resources healthcare consumes. Let’s look at the question first from the consumer/taxpayer/employee perspective.
Health care is a social good that we’d all rather avoid. No one wants to get sick. But sickness is part of the human condition and a drain on society. That’s why every country devotes a substantial share of its economy to preventing and curing illness, although no country on earth comes even close to what the U.S. spends.
Yet the U.S. gets far less for its spending than other countries. Longevity has been falling for several years. Our infant and maternal mortality rates are a national disgrace. Nearly 30 million of our fellow citizens do not have health insurance, the only advanced industrial country without universal coverage.
And, it is not as if we’re consuming more services. We don’t. As health care consumers, we’re paying the highest prices in the world for an inferior product. We can transplant organs and cure rare diseases, but are incapable of responding to a public health crisis (1.16 million dead from Covid, by far the highest number in the world). Nor have we managed to address the chronic conditions that are driving the downward spiral in longevity like uncontrolled obesity, hypertension and substance abuse.
Spending more on health care isn’t good for economic growth except in the narrowest sense. The sector employs tens of millions. Indeed, it has become the biggest employer in many cities and town. But that is economic activity that could be directed elsewhere.
Why do I say that? It is important to remember that everyone pays for health care through taxes and wages. Taxes pay for Medicare and Medicaid. Your wages pay for employer-provided health insurance, which is money that could otherwise go into your paycheck or into retirement savings or other benefits. Money spent on health care is money that can’t go to pay for other good and services, which very often are the very items that would create a healthier society like better housing, better food and greater economic security.
It is possible that health care spending in the coming decade will grow to nearly 20% of GDP as a share of overall GDP. The demographics of an aging society are real. Most drug prices, especially those new to market, will continue to rise given the power of Big Pharma. The share of resources flowing to hospitals and physician practices will remain steady.
The result, should that come to pass, will be a health care sector that continues to consume a disproportionate share of the nation’s resources while the broader society’s health continues to deteriorate. What I would rather see is a society where the health care sector’s share of the nation’s resources starts to shrink; we spend more on the social services and social goods that promote good health; and people once again are living longer, happier and healthier lives.
They consistently predict that health care spending will increase at a faster clip than overall economic growth, thus increasing its share of the economy. Over the past decade, that has been proven wrong. You ask why. Here are my three reasons, in order of importance:
1. The ACA imposed some curbs on hospital reimbursement and physician reimbursement, which those organizations did not try to overcome through expanded utilization (see 3 below);
2. Drug spending, while higher, came in below expectations; and
3. While experiments under the ACA in value-based payment did not result in substantial savings, they did create an environment among hospital providers where eliminating unnecessary tests and procedures in pursuit of overall cost constraint was perceived as a virtue. This may have had some dampening effect on spending -- not enough to transform the system, but a contributor to holding spending at "only" the rate of economic growth.
In my reading of reports and articles by CMS and CBO economists, I am always struck by how they continue to use traditional economic models that use supply, demand, price, and demographics for making their projections. That leads them to adjust their faulty projections as the long-term becomes near-term, but they always re-project the long-term (years 5 to 10 of the projections) as about 1 percentage point greater than economic growth because nothing in their underlying analysis has changed.
What they never do is incorporate other variables that may have equal if not greater relevance when it comes to the long-term: Pushback by payers, for instance, or the changing dynamics within the provider sector, where responses to exogenous factors are best understood by using the tools of behavioral economics.
1. You note--very accurately--that CMS’s forecasts of increased health care spending—including Medicare and Medicaid spending—have erred on the high side.
2. You then assert that these incorrect forecasts have discouraged Congresses and presidents from urging higher spending on the various social determinants of life.
While no. 2 is an interesting theory, do we have an serious evidence that that politicians decide about this year's higher or lower spending on housing, nutrition, or other valuable social determinants of life (SDLs) in light of CMS’s Office of the Actuary’s predictions about health care spending during the decade ahead? How many politicians—or other Americans—think that far ahead?
I think, rather, that the reality of current high health care spending—not the gap between forecasts and future spending—that inhibits federal and other investments in SDLs.
And therefore, I think, we have to find ways to contain health spending before we will be willing or able to spend more on the SDLs. This will be politically possible and financially necessary within the next decade. Why? Because health costs really are rising. Because revenues to cover them are increasingly constrained by competing demands on public spending.
We will also have to learn more effective ways to spend money on the SDLs.
But we can't suppose that more money will materialize to address SDLs, or that--if it somehow did materialize--the result would be lower health care costs.
Other rich democracies were impelled by crises inside health care (and by economic and political crises outside health care) to cover all people, contain costs, and pay caregivers in ways commensurate with coverage for all and cost control.
None financed affordable health care for all by higher spending on SDLs. The did it by fixing health care coverage and financing.
A focus on SDLs could have the unfortunate effect of letting health care off the hook.