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That Spike in Health Care Spending May Be Here, Right on Schedule

Cue premature, unnecessary panic

Getty Images: Joe Raedle

A new government report is getting a lot of attention. It really shouldn’t, at least right now.

The report is the government’s early estimate on gross domestic product for the first quarter of 2014. It contains two big findings—that GDP growth has slowed to nearly zero; and that health care spending is rising much more quickly than it has in the past.

My colleague Danny Vinik can tell you why you shouldn’t get too worked up about the first part. I’m here to talk about the second. 

According to the report, which comes from the Commerce Department, health care spending during the first three months of 2014 rose at what would, over the course of the year, equal a 10.5 percent increase. That’s way higher than it’s been in a long time. But the numbers are subject to revision, enough that the finding could change substantially. (There's a reason Commerce used the word "estimate.") In addition, the breakdown of that spending—i.e., why it’s going up—matters just as much as the magnitude—i.e., how much it’s going up.

Health care spending via Commerce

As White House officials were quick to point out, we’re not suddenly spending more on health care because we’re suddenly paying more for the same goods and services—in other words, the price of insulin, appendectomies, and other goods and services didn’t just jump. No, the main reason we’re spending more is that we’re getting more of these things. And that makes sense. More of us have money to spend on medical bills, now that the economy is recovering. And more of us have health insurance, thanks to the Affordable Care Act.

As Jonathan Chait helpfully (and generously) reminded his readers this morning, this spending spike was not just predictable. It was predicted—by writers like Ezra Klein and, yes, yours truly. And while I can’t speak for Ezra, I can assure you it’s not because I have supernatural fortune-telling abilities. It’s because I can read government reports, like those from the Congressional Budget Office and the official Medicare actuary. They, along with other respected forecasters, predicted that health care spending would temporarily surge as so many new people got health insurance. See the graph below, which is based on projections I used in a 2009 column.

The curve bends, as projected in 2009

The big unknown remains what happens next. There’s evidence to suggest that health care has undergone a real revolution, so that costs won’t continue to rise as quickly as they did historically. Hospitals are getting more aggressive about stopping infections and following up with patients after discharge. Insurers are bargaining harder with providers. Most people in and around the health care industry expect that, after an initial jump, health care inflation will settle back down at a lower level. But where will it settle? Will it be low enough to spare us painful fiscal trade-offs in years and decades to come? And what role will Obamacare end up playing in this trajectory? The answers are impossible to know right now, in part because it depends on future decisions—about how strongly to stand by existing cost control efforts, and what new efforts to try. Even among like-minded experts, there's lot of disagreement.

In the meantime, while we wait and think through the possibilities, this new report is a good opportunity to remember something that conversations about health care spending frequently overlook. Nobody likes paying a lot for health care in the abstract. But it’s not like there's some magic threshold, beyond which health care spending becomes a problem. And that's because there’s no economic principle that says a dollar going to health care is worse than a dollar going to other goods and services. The reason high health care spending should frustrate us is that we’re getting a lousy deal. All the available evidence suggests that the U.S. spends way more than other countries to get results that are not clearly better and in many respects worse.

That puts the current spike in a different light. Some of that new spending comes from previously un- and underinsured people getting care they had postponed or might not otherwise have gotten. You may have heard about one of those stories recently, in Jon’s piece or a previous dispatch by my colleague Brian Beutler—it’s about a Philadelphia man, long opposed to Obamacare, who signed up for coverage and with it got what might have been life-saving surgery. This isn’t a bad thing. It’s a good thing! If people weren’t lining up to get more care, that’d actually be a little worrisome, because it’d mean the newly insured weren’t taking advantage of the opportunity. America’s biggest fiscal challenge is keeping health care spending to a reasonable level. But “reasonable” can still represent a lot of money, as long as it’s money well-spent—and, of course as long as we're willing to pay it.