Baselines for rising health costs

Cowen asks about the viability of the ACA while considering the following trends:

1. Rates of growth stay in the range of 1 to 1.5 percent, see the work of Stock and Watson, top macro econometricians.  Try redoing budget projections with those numbers. 

2. Real rates of growth are higher than that, but they take the form of non-taxable pecuniary benefits. 

3. Growth rates are acceptable, but more and more of economic growth is captured by private capital, which is difficult to tax for either mobility or political economy reasons. 

4. The United States may need to fight a major war, or prepare to do so.  (I do favor cutting the defense budget now, but we can’t be sure that cuts can last.) 

5. The political economy of revenue hikes and/or spending cuts becomes or remains intractable.  Buchanan and Wagner have been stressing this point for decades.  A decision to borrow forty cents of a dollar spent, right now, may end up as more or less permanent, at least for as long as markets allow.  Ezra’s excellent posts about how far “right” the Democratic Party has moved on taxes are along these lines. 

6. Another major recession may arrive, perhaps from abroad. 

7. Life expectancy goes up a few more years than we had thought, yet productivity for the elderly doesn’t rise in lockstep.  You don’t have to think of that as “bad news,” but it still would be a major fiscal problem.

Health care costs are determined by a couple of things: demographic changes, induced demand, and perhaps most importantly, technology. There are people inside the medical system trying to reduce costs through more efficient uses of technology. Part of the ACA is to build systems (called Affordable Care Organizations in health industry jargon)  around more efficient uses of care - which may include cutting back on expensive tests.

It'll be interesting to see how bundled payments play into this. Currently, patients pay for treatments the same way they order food off a menu (hat tip to Zeke Emanuel for the metaphor). Under a bundled payment system, patients will have access to a wide variety of treatments and procedures. Without the accountability systems, this could induce demand for more care instead of efficient care.