When Will Health Care Inflation Normalize

Before disappearing to warmer climes for a week, I made note of an interesting argument on Mark Thoma's blog, that our worry about projected healthcare inflation may be overblown. How well can we predict the future? Not well.

Thoma quotes Jeff Sachs,

Yet somehow I'm not ready to panic about the health care costs as of 2085. Mechanical extrapolations that assume that health care costs will rise much faster than GNP between 2011 and 2085 are utterly unconvincing. Why should healthcare costs continue to rise so far and fast when healthcare costs are already vastly over-priced now compared with what other countries pay for the same services? Why should we assume failure decade after decade to use the new information technologies to lower the costs of health-care delivery and administration?

In fact, the recent trends are mildly favorable. As J. D. Keinke of the American Enterprise Institute writes today in the Wall Street Journal, the idea of runaway health spending is a "myth" because "new data show that health spending over the past several years has been normalizing toward the rate of general inflation, rather than growing higher and higher, as had been the case almost continuously since the 1970s." ...

My first reaction is that it's a bit silly to worry about what the economy will look like in twenty-five, fifty or a hundred years because - even if we pretend that we're good at making such projections based upon current data - there are too many possible intervening factors that can completely undermine the projection. Economic projections in 1900 would not have anticipated a half-century that included two world wars, the dust bowl, the Spanish flu and the Great Depression. Economic projections in 2000 did not anticipate Medicare Part D, 9/11, the housing bubble, the collapse of the auto and financial industries, or two extraordinarily expensive and protracted wars of choice. Economic projections for the public cost of health care today typically do not take into consideration the predicted impact of global warming on sea levels and food supply, the probable continued upward curve in the cost of oil and gasoline, and largely assume a return to the economic norms of the past half-century. That is to say, the projections largely assume that the economy will largely remain unchanged for the duration of the projection, even though we all know that it won't - that there will be big surprises, not all of them happy.

Without digging into the data referenced above, showing a reduction in healthcare inflation, the first thing that occurs to me is that we're really talking about the cost of prescription medications. It's anything but a secret that prescription medications play a major role in the cost of healthcare in the U.S., with pharmaceutical giants having repeatedly and successfully lobbied Congress to prevent price negotiation by Medicare and to restrict the import of identical medications from nations that offer better pricing than the U.S. But a lot of the blockbuster drugs that drove up the cost of healthcare have come out of patent, resulting in their availability in generic form and at lower prices.

Still, bleeding edge technologies tend to be expensive, and there will remain a strong incentive for pharmaceutical companies and other medical companies to develop new drugs and technologies to more effectively treat medical conditions. People will clamor for those drugs, devices and procedures over those which are (or which are perceived as) lesser, even if the improvements are marginal or the costs enormous. And somebody will continue to have to draw a line over what medications and treatments are going to be available to the masses, and at what cost. Is it possible that somebody will invent a new technique that will revolutionize medical care, allowing for vastly improved, individualized care at a lower cost? Certainly. It's also possible that we'll get the same invention but that over the short- or longer-term it will be available only at an enormous cost.

If we can change the way human beings perceive and fear death, we can achieve significant cost savings in health care. But the odds of that seem roughly equivalent to our ability to project how the economy will look in a half-century. (Okay, I exaggerate. The odds of sound economic projections over a half-century or longer are actually much greater than the odds of changing human nature.)