Greg Ip

Articles by The Economist’s U.S. Economics Editor

The health spending slowdown: Is Obamacare worsening the liquidity trap?

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Nov 26th 2013, 23:46 by G.I. | WASHINGTON, D.C.

The White House Council of Economic Advisers last week released a long and thoroughstudy on the recent slowdown in the growth of health care spending.

Americans have been so worried about runaway health costs for so long that this deceleration has been almost universally welcomed. Good economists that they are, the CEA points out that slower health spending can be good or bad. Health outlays depend on both the volume of services consumed, and their price. If people consume more services that improve their health, that’s good. But if they consume more useless services or simply pay a higher price, that’s bad. In particular, “Increases in health care prices (above general price growth) are unambiguously bad for households since they reduce the amount of health care a household can buy with a given number of (real) dollars.” The CEA goes on to note that both health volume and prices have slowed. Indeed, health care inflation is now running at the same level as overall inflation.

By their logic, this is unambiguously good. But it’s not. Lower prices are unambiguously good forconsumers of health care, but consumers are not the same as households. Some households are producers of health care: they’re doctors, nurses, home health care aides, or health insurance plan administrators. Therefore, a decline in the price of health services may help consumers at the expense of producers. Ordinarily, this would not be a macroeconomic issue. But it is when inflation is already too low, in which case this deceleration in prices is potentially bad.

I say “potentially” because in some circumstances, lower prices are a net positive for the economy. For example, higher productivity would enable providers to lower prices with no loss of income. Obamacare contains many incentives to raise efficiency, such as penalizing hospitals for high readmission rates, but there’s little evidence productivity as a whole has risen enough to tip the overall trend. Most of Obamacare’s impact on spending has been through brute reduction in payments: to Medicare Advantage plans and to hospitals who treat Medicare patients. The Administration hopes providers will cope with lower payments by finding new efficiencies; but they may instead simply accept lower profit margins, though over time that could drive providers out of the market, reducing supply; or they may negotiate lower input costs. And since health care is labour intensive, that means wages.

The chart nearby shows that hourly earnings growth in outpatient health care and hospitals has slowed quite sharply in the last year, from well above

 to roughly the same as the private sector average.  I wouldn’t necessarily chalk this up to Obamacare. Given the noisiness of the data, I’m reluctant to attribute it to anything. In any case, Obamacare is probably doing less to slow spending than other trends such as rising out-of-pocket expenses. Nonetheless, since health care is such a large part of the economy, the slowing in its prices and wages has played a significant part in the overall fall in inflation and in continued weak wage growth. This is not a critique of Obamacare. Like most policies, it creates winners and losers and perhaps consumers of health care need help more than the providers these days. In ordinary times, downward pressure on prices and incomes in one sector would be offset with higher prices and incomes in others as the central bank kept inflation at target. But these are not ordinary times. The Fed is already struggling to keep inflation from slipping below target.  Any policy that shrinks nominal income makes its job harder.
The original article is linked here.

Written by gregip

November 26, 2013 at 6:36 am

Posted in Uncategorized

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