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