The Mystery of Future Health Care Costs

Ezra Klein had a post last week about the accuracy of projections about health care, in which he called reports like the recent one from HHS a sort of Rorschach test--conservatives and liberals each see in them what they want to.  I think this is true, to a point.  The history of health care spending projections is considerably more checkered than either liberals or conservatives acknowledge.  Over time, it is true that far more health care programs have busted their budgets than have come in considerably under budget; on the other hand, some cost cutting programs have ended up netting more than expected.  But virtually all of the reports written on this question consists of simply cherry picking your examples very carefully in order to generate the answer you want.  This would be a perfect job for the CBO, except that members of Congress request those reports, and I doubt either party is willing to risk getting the wrong answer.

But there is one example of "cost underruns" that I keep hearing, which I think should be used cautiously if at all.  That's Medicare Part D, which came in substantially beneath projections.

As it happens, I just turned in the first draft of a piece on the status of prescription drug pipelines.  You'll have to wait to read my opinions on that question, but investigating the question has given me a better appreciation of just how unique an environment surrounded the enactment of Medicare Part D.  There was a broad shift in the market for pharmaceuticals on several fronts:  fewer blockbuster drugs were being approved, and more blockbuster drugs were going off patent.  Meanwhile, pharmaceutical benefit managers were really cracking down on what drugs went into their formularies.

A drug like Eli Lilly's Effient platelet inhibitor would have been a blockbuster ten years ago--it causes slightly more bleeding, but it's also more effective than Plavix, its main rival.  But Plavix goes off-patent in 2011, and is less expensive even now, so Medco, a major pharma benefit manager, is funding its own research to find ways to identify the small subset of patients who will do better on Effient.  In other words, private firms have started to do the sort of comparative effectiveness research that the architects of health care reform promised.

There are several good reasons to think that this won't generalize well:

• Secular changes in the health care environment are random  That is, in this case, Medicaid undershot projections.  But that's not because the CBO was "too conservative"; the savings came from broader shifts in the healthcare market, not something that the legislation did.  Broader shifts in the healthcare market can move either way; there's no special reason to think that they are more likely to be downside surprises.
• Medicare Part D worked through the private sector  Medicare Part D used private insurers at a time when they were severely cracking down on the drugs they were willing to pay for.  Medicare Part D benefited from this because it worked through private insurance firms.  However, the bulk of the coverage expansion in the new law comes from Medicaid expansion.  Medicaid benefits from that famous ability to centrally negotiate--but not so much from what private firms are doing.
• Falling prescription drug costs do not mean falling health care costs  To the extent that these secular trends in the prescription drug market continue--and unfortunately, I think they will--that's bad news for health care reform cost control.  There's some pretty decent evidence that new drugs hold down health care costs overall because they substitute for labor-intensive options like surgery and other sorts of therapy.  Labor is the one component of health care costs that is probably hardest to control.  So if we're getting few new prescription drugs, that may mean that estimates of cost growth in other sectors are too low.
• Services expansions historically seem to overshoot their cost estimates  A lot of effort has been expended on the pro-reform side singing the praises of unexpected cost savings from things like delivery payment reform.  Leaving aside arguments about the methodology of the underlying studies, I'd say a survey of the history of health care reforms indicates that changing the payment formulas seems to be a lot more successful on the cost front than broad coverage expansions, which--except for the one case of Medicare Part D--always seem to cost much more than expected.  So even if you think it's possible that various delivery forms will deliver higher-than-expected savings, you have to allow for the possibility that higher-than-expected utilization will eat your savings, and then some. And that's exactly what's happened from most of the coverage expansions in our nation's history.  It's ridiculous to talk about some changes to Medicare payments while ignoring the fact that reform in Massachusetts is already costing about 20% more than projected.  Not to mention, umm, every other state-level coverage expansion I'm aware of. 
  

Many of these arguments run the other way as well, of course; these things are by their nature unpredictable.  There could be all sorts of changes in the healthcare market which will make the price of hospitals fall along with the price of prescription drugs.  But I wouldn't suggest that you bet a lot of money on that possibility.  I mean, aside from the small fortune you already have.

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