Why Health Cost Growth Increases after Estimators Say it’s Slowing: Observer Effects and Feedback Loops

“Health cost growth has slowed down, we think. So let’s increase health costs.” This is the federal government’s apparent response to some recent sanguine estimates about the future of health cost growth. We might call this response a policy version of the “observer effect,” where the mere observation of reality changes that reality. In this case, the observation that health care costs may be increasing more slowly than expected creates a political reality in which fewer efforts are exerted to keep costs under control.

Projections based on past historical trends are fraught with danger. The influence of government policy sits near the top of that danger list. Since federal and state spending plus tax subsidies now cover about 60 percent of the health care budget, government legislation decides much of what the nation will pay for health care.  Speaking technically, policy is endogenous to—or influential on—the past trends we measure.

Logically, then, future legislation too has a powerful effect on the direction of health costs. But possible policy changes are an unsteady foundation for cost projections. Government agencies like the Congressional Budget Office try to get around this dilemma by treating policy as exogenous to—or not influencing—cost projections. That way, those agencies can display the implications of current laws, even when those laws imply a growth in cost that is unsustainable.

But health researchers, the public, or elected officials who conclude that past trends will simply continue often fail to account for how policy decisions feed health costs and vice versa. US health care insurance, including that provided or subsidized by government, still offers fairly open-ended access, allowing consumers to spend more and providers to earn more at others’ expense. If policymakers interpret slower cost growth to mean they need fewer new cost-reducing measures and can even rescind some old ones, then as a consequence health costs are going to rise faster.

It now seems clear that Congress and the Obama administration have responded to these new estimates by taking a more lackadaisical attitude toward controlling costs. Two pieces of evidence:

  1. Congress has long squabbled over how to deal with legislation that tried to make the growth in Medicare costs sustainable by cutting payment rates to doctors for certain procedures. Past efforts led to “doc fixes” that held off such cuts for a while and let them accumulate. All was not lost: according to the Committee for a Responsible Federal Budget, these annual forestalling actions involved significant other health cost cuts to pay for each fix. In 2015, however, Congress threw in the towel: it abandoned the old requirements on doctors while providing limited real offsets.
  1. Many Republicans and some Democrats now oppose a tax imposed under Obamacare that requires insurance companies to pay a tax on high-cost insurance plans (plans whose value exceeds $27,500 a year for a family and $10,200 a year for an individual in 2018). Admittedly an imperfect device, the tax did address both conservative and liberal concerns, backed by solid research, that offering a tax subsidy for costs above a cap mainly led to higher health care costs while doing little to expand coverage. Abandoning the high-cost plan tax would effectively increase health costs even more.

Harder to substantiate are cost-controlling initiatives that are abandoned or never undertaken. For instance, President Obama has removed some of the health saving initiatives that used to be in his budget—such as limits on state gaming of Medicaid matching rates—presumably because he thought these initiatives were unlikely to get through Congress, or he had enough health care fights on hand. How much have payment advisory commissions felt that they could let up on new suggestions to reduce prices? In general, how does a perceived reprieve from pressure lead any of these actors to kick the can down the road to their successors or at least until after the next election?  Paul Hughes-Cromwick of the Altarum Institute also asks whether something similar doesn’t go on in the private sector: for example, would specialty drug makers price new entries so aggressively (e.g., Sovaldi for Hepatitis-C or even Jublia for toenail fungus) if we weren’t simultaneously coming off historically low spending growth?

My advice to estimators: include a feedback loop to demonstrate how your estimates affect the behavior of those making decisions on the basis of your estimates. Your projections of lower health cost growth may end up increasing health costs.



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