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Work and prosperity
29 August 2013

Good news! Healthcare costs are bankrupting us at a slower rate than ever before!

The decision to ring-fence the NHS budget is taken by some on the right as evidence that the Government is insufficiently serious about cutting public expenditure. In fact, securing acceptance for a near freeze in health spending is one of David Cameron’s more notable achievements. 

Just how long this restraint lasts remains to be seen. It is widely assumed that the aging (and fattening) of the population will, in the long term, drive healthcare expenditures ever higher. 

However, in an article for Bloomberg, Megan McArdle brings us some mildly encouraging news from America. Spending on Medicare (state funded health insurance for the over-65s and younger people with disabilities) “has been growing more slowly than its historical average”.

It should be stressed that it is the rate of increase in spending per beneficiary that is slowing down. Nevertheless, this could be a sign that an end to the escalation of healthcare costs is finally at hand. 

A Congressional Budget Office investigation has tried to identify the causes of the slow-down:

  • “If you had to guess why Medicare was growing more slowly, you’d probably come up with one of two answers: ‘Obamacare’ or ‘the recession.’ (No bonus points for guessing which party prefers which answer.) But the CBO largely rejected both those answers.”

Instead, the leading identifiable cause is demographic change:

  • “The largest effect was one I hadn’t expected: the changing age profile of Medicare beneficiaries. The boomers bulge is adding a large influx of relatively young people to the system, dragging down its average age – which in turn, lowers the average spending per beneficiary.
  • “If you’d ask me what effect the boomers would have on Medicare, I probably would have thought of this eventually, but I wouldn’t have predicted that the effect would be so large. The CBO estimates that this factor alone lowered the annual growth rate of spending per beneficiary by three-tenths of a percentage point.”

Actually, this isn’t at all encouraging. All those newly retired baby-boomers may be bringing down the average age of people on Medicare – but only by increasing the overall number of beneficiaries. Furthermore, as time goes on, younger retirees will become older retirees – with all that implies for demand on the system.

However, the average age effect only accounts for some of the reduction in the rate of increase in spending per beneficiary:

  • “...that still leaves a good bit to account for, since the gap between the current rate and the historical rate is 3.2 percent. The remainder of that gap is explained by…well, we don’t know. It may be changes in the way that care is delivered…”

If true, this really would be good news, because progress on efficiency is absolutely vital if healthcare is not to bankrupt the western world.

It’s also worth noting that if such progress is being made in America, then it began before Barack Obama’s much-vaunted reforms:

  • “...probably driven by insurance companies and Bush-era Medicare changes, not Obamacare, since the broad economy-wide decline in health-care cost inflation started in the middle of the last decade…”

Perhaps healthcare providers have realised that the future of their industry is all about value-for-money. Certainly, there can be no more blank cheques from the taxpayer – not even for the NHS.


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