Fed Budgetary Experts Demolish CBO Health Cost Model, the Linchpin of Budget Hysteria

A remarkably important and persuasive paper that calls into question the need for “reforming” Medicare has not gotten the attention it warrants. “An Examination of Health-Spending Growth In The United States: Past Trends And Future Prospects” (hat tip nathan) by Glenn Follette and Louise Sheiner looks at the model used by the Congressional Budgetary Office to estimate long term health care cost increases. Bear in mind that this model is THE driver of virtually all forecasts of future budget deficits.

This paper, although written in typically anodyne economese, is devastating in the range and nature of its criticisms. And the reason this assessment should be taken seriously, independent of the importance of the issues it raises, is that the authors are uniquely qualified to make this critique. Follette is chief of the Fed’s fiscal analysis section. Sheiner, a fellow member of that group, has worked for both the Treasury and the Council of Economic Advisers previously. In other words, the sort of analysis they have made here is the core of what they do on a daily basis.

The argument made by the opponents of the plans to cut Social Security and Medicare generally take this form: concerns about Social Security are greatly exaggerated. They are based on long-term forecasts, which are notoriously inaccurate in outlying years. The most commonly cited, by the Trustees of the Social Security system, projects the exahustion of the famous trust fund in 2033. As several analysts have observed, if Social Security really has a problem, we’ll know it in plenty of time; there’s no need to do anything immediately.

By contrast, conventional wisdom is that Medicare does have a long term cost predicament, but the problem is not demographic, but that of the steep rise of health care costs in general.

The fundamental beef of Follette and Sheiner with the CBO model is that it naively assumes past growth in health care spending as the basis for its long-term projections. The result is that it shows that trees will grow to the sky. One of the things anyone who has built forecasting models will tell you is you come up with assumptions that look reasonable and then sanity check the output (for instance, does your model say in year 10 that your revenues will be 3x what you can produce given your forecast level in plant and investment? If so, you need to make some revisions). The Fed economists point out numerous ways that the model output flies in the face of what amounts to common sense in the world of long term budget forecasting. From the opening of the paper (emphasis ours):

Long-run projections of the U.S. federal budget have played a prominent role in discussions about fiscal policy and the design of major transfer programs for several decades. The projections typically show large fiscal imbalances owing to ramping up of retirement and health care costs relative to GDP. Health care costs are the key factor in these projections for two reasons. First, in current projections they are the prime source of growth of spending as a share of GDP. Second, they are the most uncertain part of the forecast. For example, the Congressional Budget Office’s most recent long run outlook shows spending on Medicare and Medicaid, the governments health programs for the old and poor, respectively, rising from 4.1 per cent of GDP in 2007 to 19.1 per cent of GDP in 2082.1 By contrast, Social Security benefits (the government’s main old-age pension program) increase only 2 percentage points, from 4.3 per cent of GDP in 2007 to 6.4 per cent in 2082. Another analysis by CBO suggests that an 80 per cent confidence band around the Social Security projection would be from 51⁄2 to 91⁄2 per cent of GDP.2 CBO did not present similar calculations for health spending; instead, they projected health spending under three different assumptions about the rate of growth of age-adjusted health care spending in excess of per capita income. Their projections show health spending ranging from 7 to nearly 40 per cent of GDP by 2082.

By comparison, defense spending as a percent of GDP peaked at 42% of GDP in World War II. A model that presents as a possible outcome that the US will devote nearly 40% of GDP to health care spending a long-term, sustained outcome, is ludicrous on its face. The CBO assuming public health care spending will sustain its growth rate of the last 50 years for as long as they do (see further discussion below) with no policy changes is like budget analysts in 1946 assuming that military spending will grow at the same rate it did during World War II without any policy changes. Yet they further assume that, having reached this crushing level, Medicare costs in 2082 will still be growing faster than GDP!

The underlying issue is that nothing that is a large portion of GDP can exceed the growth rate of GDP forever, or even for all that long; that’s how we’ve gotten in the insane position of having health care reach 16% of GDP. The term of art is “excess health care spending growth” which as noted above, they define in relationship to per capita incomes. The Fed economists make the following observations in their paper:

1. Given the concern about health care cost escalation, and the pressure being exerted now by employers to contain these costs, as well as the fact that other advanced economies have shown declines in excess costs, the growth assumptions look very aggressive. Moreover, the excess growth took place during a period when government and private health care insurance expanded greatly. In 1960, out-of-pocket spending was 52% of medical spending; by 2006, it had fallen to only 13% by 2006.

Follette and Shiener also looked at the composition of cost drivers and argued that certain key ones will moderate:

Accordingly, 1.1 percentage points of the [historical] 2.2 percentage points of age-adjusted excess growth over the period resulted from technological change and other factors and 1.1 percentage points reflected the effects increased insurance coverage and administrative costs.16 The historical data therefore support excess growth of 1.1 per cent per year if we assume that out-of-pocket costs do not decline further and that administrative costs (as a share of expenditures) do not rise further. However, demand should fall short of this as consumers respond to rising health bills.

The Fed economists separately find that excess growth has averaged 2% over the last 40 years but has been slowing and argue that 1% excess growth is a likely upper bound for the long term average. They posit that excess growth of 2% can be maintained for only a few years at most because consumption as a percentage of GDP is anticipated to fall (this is in the CBO’s own models; it’s mainly the result of the trade deficit falling). By contrast, the CBO assumes 2.4% excess growth for Medicare and 2.2% for Medicaid over the next decade, falling monotonically to 1.1% for Medicare and 0% for Medicare by 2082. If you’ve ever run financial models, you’ll know that goosing the growth rates in the early years has an impressive impact on the final result.

2. The CBO model produces the peculiar result that government funded plans will show faster cost growth than private plans. From the article:

Our chief concern with their projection is their assumption that per capita spending by Medicare grows much more rapidly than that of the private sector. The projected divergence seems inconsistent with the underlying assumption that policies are unchanged because Medicare and private sector insurance plans have had similar payment rates historically.

3. The Fed budget experts note that the CBO analysis violates the requirements for CBO budget projections. The CBO is tasked to forecast assuming no policy changes. But in simply relying on historical trends, which as noted above include considerable expansion of government-funded health coverage, they have effectively incorporated the hidden assumption of continued expansion. Put it another way, the forecasts should have explicitly backed out the impact of historical increases in health insurance coverage to arrive at a true baseline growth rate. Per Follette and Sheiner:

The lack of distinction between policy and other factors is a particular problem because CBO uses different excess cost growth assumptions for Medicare, Medicaid, and other health spending, and the CBO projection is supposed to be under the assumption of no policy changes. Past Medicare spending growth includes factors that are not assumed to continue in the future. For example, the Medicare Part B premium was not previously indexed to Medicare spending; thus Medicare spending growth grew faster than overall health spending, as Medicare picked up a higher share of spending. Similarly, Medicare policies changed to include renal dialysis, HMOs, coverage of the SSI population, and more broadened coverage of home health care. As CBO is not assuming further expansion of Medicare, it does not seem reasonable to forecast future growth based on historical growth rates that include such expansions. Similar issues arise with Medicaid.

4. Follette and Sheiner find that, contrary to conventional wisdom, that more realistic health care cost assumptions allow for some improvements in coverage to low income groups, provided government coverage to the better off is not increased further:

We find that a narrow expansion of assistance to the lowest quintile would have only minor consequences to government finances but more broad-based programs would have materially deleterious effects.

* * *

The CBO’s performance on this front looks like malpractice. The Fed economists note telling irregularities, such as the substitution of scenarios, as opposed to the use of confidence band analysis, as the CBO employed in its Social Security forecasts. And this would not the first time that CBO has apparently allowed political considerations to interfere with its pretense of objectivity. First we have the case of CBO analyst Lan Pham, who was fired for attempting to incorporate the impact of foreclosures and chain of title issues on home price and property tax forecasts. Second, we have the instance of Tom Ferguson and Rob Johnson of alerting the CBO to a significant omission in their deficit analysis, that of failing to include financial assets in their debt-to-GDP ratio calculation. CBO staffers have not disputed the accuracy of the Ferguson/Johnson research but nevertheless will not change their projections. Now we have what is demonstrably an overly aggressive set of assumptions driving health policy debate, with two Federal Reserve analysts sufficiently taken aback by the model as to publish a serious takedown of it.

The CBO’s independence is, like its output, treated as above question. It’s time to subject both to harsh scrutiny.

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  1. wunsacon

    The hysteria is all a sad joke. The net cost of Medicare will go to near-zero. Single-payer, universal health care will cost essentially nothing. Immortality treatments will cost essentially nothing.

    The current cost of medical care stems from the cost of employing legions of people who spent decades studying and preparing to provide medical services.

    The future cost of medical care will drop because IBM’s Watson “14.0” will run in a cloud and solve every medical problem anyone ever faces (including the medical problem known as “old age”).

    The transition will be “very non-linear”. At the very least, estimating medical costs 20+ years out is a joke.

    The biggest “revolution” in human history is less than 20 years away. The Industrial Revolution, Fossil Fuel, and the Internet had less of an impact on human civilization than what’s coming.

    1. Michael

      I wish you were right, Mr. Kurzweil, but sadly I fear most of us will be dead of buckshot and shrapnel before we see an immortality treatment.

    2. David

      Yes, in the streets they will be chanting:
      “What do we want ? A Singularity”
      “When do we want it ? Now”

      1. wunsacon

        Not sure if you were serious or are subtly ribbing me for making such crazy predictions. (Yeah, I can chuckle about it.) In case you’re seriously asking…

        I don’t know what happens past the AI Event Horizon. I *hope* even sociopaths and low-information voters learn to recognize that machines now “do all the work” and thus:
        (a) Dispense with the notion that any single human continues to “deserve” an outsized percentage of global production.
        (b) Decide in favor of egalitarianism.

        But, who knows? Maybe a new religious prophet will appear in time to help sociopath 1%-ers feel better about hijacking Global Inherited Technology (18 billion years in the making) for their own exclusive use and to sequester/starve/kill anyone outside the cult. (There seems to be no limit on what horrible things some humans do to one another.) So, not only will many people die (as Michael says: from “buckshot and shrapnel before we see an immortality treatment”) before then. But, in and after the event horizon, the powers that be might kill off a huge number or percentage of laborers — since they no longer need us to service them.

        1. JayTe

          Amusing to say the least that you think technology will address the problem of health care costs. Especially given that the technology has already been around since the early 20th century to address things like cancer. And the present level of knowledge of nutrition, the human body and diseases in general should have caused prices to decline continuously since the beginning of the 20th century. But alas, the key thing lacking in all of this is COMPETITION!!! The FDA (which is under control of the pharmaceutical companies – look at the CVs of past directors), the USDA and head of Dept. of Agriculture (which is under control of companies like Monsanto and big Agro) are the primary reason that health care costs continue to go up. In almost every country (save place like Thailand and Taiwan who guess what? – have two of the least expensive and best healthcare systems in the world) the politicians are bought and paid for by big Pharma and Agro doing their bidding. No chance for any reduction in health care costs until that is addressed.

        2. JayTe

          And please note I don’t mean just among insurance companies. I mean across different type of health care providers (i.e. conventional, alternative, etc) without government protecting pharmaceutical companies who roll out products that kill about 1 million persons per year in the US (look up Iatrogenic deaths in US). There is no reason why pharmaceutical companies cannot take insurance policies to cover potential lawsuits for their products rather than forcing us to provide coverage for them via the FDA. We would have a more honest assessment of the viability of the drug since it would be in the interest of the insurance company to ensure that they would not have to pay damages on a faulty product. Whereas the FDA regularly overlooks the assessment of its scientists because the top people are all former employees of the same pharmaceutical companies pushing the drugs on the public.

        3. FoonTheElder

          Unfortunately, most of US technology is used to either blow up people or chit-chat aimlessly over the internet. When anything of real value is created it is immediately sent overseas to be manufactured, leaving fewer people in the US with wages high enough to afford it.

  2. JGordon

    This does not alter the fact that medical costs in the US are about 10X what anyone I know can afford.

    Really, people in the 1950s and 60s didn’t run the (more than likely) risk of bankruptcy just for a simply emergency room visit. And it’s insane that people are willing to put up with that today. It’s like boiling a frog alive in water without it noticing. Sick.

    Anyway, as long as I can’t afford medical care I don’t really care if anyone else gets it either, old or not.

    1. jerry

      My thoughts exactly. This is one of the worst effects of the budget fear-mongering done by those in Washington. Instead of focusing on how to fix our clearly broken healthcare system, we end up spending our time trying to fight a losing argument. It’s just like what the oligarchs do with global warming – continually claim that the proof isn’t there even though 99% of scientists agree that it is. As long as you keep the debate focused on proving yes or no, then you don’t have to worry about anyone actually doing anything.

      1. jayackroyd

        That whole not admitting climate change thing is apparently over. See the front page of today’s NYT. The stories make no bones about how fucked we are, and how we have to respond quickly.

        Sandy has apparently lifted the scales from the editors’ and publishers’ eyes.

        1. Dirk77

          As long as they get the 1% to pay for it, in some reverse shock doctrine way, then I’ll go for it. I see now why taxes must be progressive because that is a major way for the people with the power to feel the consequences of their actions.

  3. MyLessThanPrimeBeef

    It’s hard to imagine health care spending at 40% of GDP by 2082.

    Frankly, a lot of things we hardly imagine could be 20, 30 or 40 years ago are here today. We see them though we don’t necessarily know how or why.

    I think with ‘proper edcuation,’ it’s possible we will come to terms with 40% GDP health care spending without shocking ourselves into requiring more health spending (i.e. sedation)…perhaps those 0.01 percenters who live on the first part of the 1.1 percentage point of excess growth tied to ‘adminitratiive costs and increaed coverage’ will see to it that we ‘perceive’ correctly (i.e. understand the 40% GDP spending as the new normal of 2082), because if you used to pay 52% out-of-pocket and are only paying 13% out-of-pocket now (or in 2006), what will you lose, what will you not be able to access, if they don’t continue to lower that percentage (the administrative costs poeple would be very happy to tell you that, conveniently ignoring the administrative costs part of that 1.1 percentage point of excess growth)?

    1. FoonTheElder

      We already waste $1 trillion per year compared to every other developed country ($3200/per person per year x 312m).

      We already pay enough for coverage for everyone, it’s just that our failed system is more worried about paying off big corporate health care price gougers than actually deliver health care.

      What do we get for our extra $1 trillion? 25% uninsured or underinsured plus 40,000 dead each year. At the same time, every other developed country has practically 100% of its people covered.

      What does Obamacare/Romneycare do? We’re now only 50 years behind the times instead of 100 years like before. After all, Germany has had universal health care for over 130 years.

  4. Jefemt

    I’ve tracked past rates and projected future rates of where my county property tax bills will be when I had hoped to work a bit less. It’s not a pretty picture. While past results may not predict future performance yada yada, looks to me I will be working pretty hard just to keep my mortgage-free home from seizure by the County for non-payment. Add to that the federal tax liability for a no-limit-$700-dollar hammer-beyond-scrutiny military budget, and the new bottomless pit we just enabled called the private sector for-profit health INSURANCE (not care) system, and I think I will be working harder than ever the rest of my life. Than goodness Mr. Kurzweil will let me live forever, so we I can be a taxpayer-in-perpetuity keeping the suckah going for United Health Care and Drone, Inc. Maybe I should look for work with them, and create a virtuous cycle of wealth transfers. An MC Escher mobius nightmare

  5. rob

    health care is one of those basic things people are figuring out.advancements in technology and knowledge pervade our society.we expect more,and rightly so.
    The current state of assumptions by the economic/policy wonks,fathoms this astrological rise in healthcare costs to rise until the sun burns up……that is garbage…
    the first reality is that we can’t afford it now.and with the current leadership of those policy wonkers,more of us will not be able to afford it then…which will cause implosion of the system as it is.
    the people are going backwards as we speak, first you start skipping check-ups,then things that could get fixed early,become more damaging, then what was a simple thing gets complicated, then the costs are totally out of reach.. but then a crises happens anyway…. and what?the end.emergency room bills you can’t pay…..a system hollowed out ,causing growth for profits sake….and letting the population it is supposedly trying to serve, hang in the wind…
    after they bankrupt america,where are there profits going to come from….. a healthcare plan where they can harvest organs and tissue in lieu of cash payment at time of service?
    I say the healthcare industry… and I mean the whole damn thing out to be siezed by use of eminent domain, and the new secretary of healthcare and his/her agency ought to control the whole thing….. which is to make the option of health, possible for all….just like one of roosevelts new deal policies,let the people provide their own healthcare, while the funding and the factoring are gov’t assited and overseen with complete transparency, so that the general population has a way to constanly and vigilantly oversee the oversee-er….right now the gov’t already spends an insane amount on heathcare… giving it to private contractors…..so even without the necessary implementation of kucinich’s HR2990,the NEED ACT,which would enable the people of this country to benefit from creating their own money,thus having money to fund state programs and federal programs.without debt…..
    when these wonks want to get real, I would like to see those models…
    Personally, I don’t give a rats ass to see assumptions based on these rediculous models we call”our current system”…It sucks, and its getting worse… what else do I need to know?

  6. Tom

    Has there been any studies showing what effects raising the income contribution caps would have on these programs – SS, Medicare, etc. combined with limits on final payout adjusted to realistic living standards?

  7. run75441


    I have mentioned this before and caught a lot of flak, Elmendorf was one of several who helped kill Hillarycare.

    1. Yves Smith Post author

      Yes, Dean Baker (along with others) have been criticizing these models for some time, but the fact that it is the folks in the Fed’s fiscal impacts section who have also gone after it (i.e., are not card carrying lefties and therefore don’t have an axe to grind) puts this in a different light.

      What is distressing is that Krugman in particular (someone who is seen as knowledgeable about health care and a pinko) has been taking the conventional line.

  8. LeeAnne

    Its a system that interferes in personal relationships -a corrupt system that preys on life itself. The one-on-one of helping your neighbor is pratically against the law -the insurance system threatens to sue you -particularly when you see him lying in the street wounded and unattended. Just look at these guys in power. They look like zombies, act like zombies; they must be zombies. That’s what the system rewards.

    Just check out Bloomingberger in New York City. The guy has no moral compus, no talent for people, and no interest in such. He needs a job for God’s sake -an appropriate job for him -like flipping burgers somewhere. He’s a flop when it comes to IT which he supposedly made his own fortune on -on his own -hard to believe when, under his watch, IT contractors for the City of New York have swindled the city out of close to a $Billion, and while management of his own company is out of his hands legally, it has undergone the biggest expansion into securities research of its history -without him.

  9. Sheer Insanity

    The most wealthy and powerful economic and military hegemon the world has ever seen is too broke to take care of the basic healthcare needs of its citizens and even “official” analyses of the subject are clouded with propaganda and disinformation such that intelligent political solutions are impossible? Yep, the end of the empire is in sight alright. It won’t be missed.

  10. LeeAnne

    Bloomtheburg waited until participants were here in the city before canceling the Marathon. So, not only were victims of the storm stuck, many in hotel rooms that had been reduced in price for them by kindly hoteliers, were necessarily thrown out when tourists with reservations arrived. So Marathon tourists are also stuck and bound to spend money while victims have been forced out by the situation beyond the control of hoteliers into an uncertain fate. A win-win for capitalism -and the essence of this zombie mayor.

    That’s what criminal capitalists exploiting taxpayers would call a win-win.

    I’m all for capitalism with powerful rules, regulations and penalties; and oversight with no secrecy for any of them any time. 50-50 male and female for power positions would also go a long way toward a better world. It’s maleness, male values with repression of women and their values, that has brought the world and its inahabitants to the edge of a horrible fate.

    When you consider the power of exclusively male secret societies to choose winners and losers in the male population, and the perversions that supports and promotes, you’ll see things my way.

    If women in the US hadn’t gotten off on sexuality which any adult human being can take care of for themselves; had they hammered away on issues of income and power, we’d have made a better world.

    1. bhikshuni

      Anyone who does not understand sexual self-determination as economic and political self-determination has never passed Women’s Studies 101 (or the street DIY version)

  11. Benedict@Large

    The idea that healthcare as a percent of GDP can keep rising is nonsense, a fact illustrated by the current crisis is healthcare financing. I expect ObamaCare will push this from 16% to perhaps 20% (an educated guess, nothing more), but after that, that’s it. The system (the people, their employers, etc.) simply can’t tollerate any more.

    What you will see happening instead is an increasing amount of what’s been happening in the run-up to 16%, but going substantially unnoticed; that is, increasingly, catastophic care will be denied, and these denials will focus first on the poor, and then will work their way up the food chain. More and more people as time goes on will be deemed to be “not worth it”.

    It’s OK, however. Marx predicted it, and capitalism requires it.

  12. Don Levit

    I am wondering if the report mentioned anything about the upcoming subsidies in 2014.
    I have concerns that the subsidies under the PPACA will encourage the newly insured to continue to spend for medical care. At a minimum, the subsidies will make the heretofore expensive insurance much less cheaper. And, with the subsidies going directly to the insurers, this newfound money is nothing short of a windfall.
    In particular,the medical loss ratio is 80% for individual owned policies. In the attempt to ensure that people get their money’s worth, we are merely encouraging premiums to rise as the subsidies and guarantee of 80 cents per dollar in benefits for every policyholder comes to fruition.
    Insurance costs will decrease only when people are incentivized not to make medical claims (either pay out of pocket,liquidate investments, borrow, etc).
    When we get to the good old days of “I hope I never have to make a claim,” then we will see reductions in medical expenses and the corresponding premiums.
    Don Levit

    1. run75441


      Nonsense, the newly insured who were not insured practiced the highest restraint already . . . going without healthcare which in the end costs more as they become sicker. The subsidies do not pay for everything and those who receive them still have to pay which is dependent on the plan they choose. I doubt we will see many newly insured choosing a gold or platinum plan as even with the subsidies, the cost is too high and the subsidies are base on the silver plan which has a deductible and a % ratio after deductible.

      Medicare, Medicaid, and commercial insurance are mostly a reflection of the HEALTHCARE INDUSTRY. Your picking on healthcare insurance is misguided as the cost driver is misguided. The PPACA is big on preventive care over specialist care to the point it skews payments to family doctors over specialists. It will change the cost model from fees for service to fees for better outcomes improving the quality of medical treatment very much along the lines of what has been seen in the VA (Longman’s “The Best Care Anywhere”).

      There is still much waste in Medicare and Medicaid which can be driven out with the full implementation of the PPACA. Obama has pledged to give Medicare more latitude in negotiation with the healthcare industry. This alone could and shall pay for much of the subsidies to people getting them Remember, we have a huge target and in many cases US healthcare is twice what it is in other countries.

  13. nobody

    What I would like to know is, if somebody says — well, Social Security needs to be changed because (a) when it was instituted there were more young workers for each person being supported by it, and (b) it assumed shorter fewer years remaining on the other side of 65, how is that question best answered?

    Where can I find some clear, straightforward, layperson-friendly debunking of that line of thinking?

      1. nobody

        I mean, if somebody’s telling me that Mitt Romney “made” his money turning companies around, I can send them to Matt Taibbi’s piece:


        And there it all is, laid out for the reader, easily digestible in a short sitting. What I am looking for is a small set of links (like maybe 2-5) that are readily comprehensible and accessible to the non-expert. Something that the common reader can come away from saying, “I’ve been sold a bill of goods.” Or at least to enable me to reach the point where I have a good, solid, clear, convincing answer.

        Surely in the hive mind of the NC commentariat there are a few suitable specific suggestions?

        1. run75441


          What ever happened to productivity gains transferring the gains to Labor? There is also still the aspect of higher income for most which will be taxed and thereby increasing revenues. If we ever get more people back to work, you will see revenues increase also and beyond what is paid out.

          For as little as 1 tenth of 1% for employer and employee for ten years and not necessarily every year the problem goes away. As Dale Coberly likes to say . . . 40 cents a week for the average worker.

          Ignoring Don Levitt diatribe, I would recommend Bruce Webb and Dale Coberly. The Dean Bakers and Barkley Rossers of the world pay attention to both of them. The issue today is the GF is now having to pay back what it borrowed from SS which means higher taxes along the way and most likely for the 1%.

        2. bhikshuni


          is the graphic;

          this one is the text:

    1. mac

      You must find a person who has no idea to push and is willing to present facts as facts. We do indeed have a real shortage of such folks.
      WE have an abundance of opinions but few facts being presented.
      As an example if you read Krugman’s ideas on any thing you get opinion and few facts.

      1. Don Levit

        The Angry Bear Blog was a very interesting experience for me.
        I found many people there, particularly Bruce Webb, with some extremely strong opinions based on extremely weak facts.
        I have spent several years accumulating excerpts and links from various governmental sources, such as the Treasury, The CBO, The GAO,. and The Social Security Administration itself.
        They all refer to Soicial Securiry and Medicare as being on unsustainable trends.
        Just like health care increases is unsustainable, so too are the forecasts for Social Security and Medicare.
        Bruce was a very challemging person, and very intelligent.
        I enjoyed providing the excerpts and links as a way to more objectively answer his opinions and dreams.
        But, he simply could not go toe to toe with the various government agencies who directly disputed many of his important opinions.
        Using those governmental links, I believe, made me a more objective source than simply mouthing what I hoped to be true.
        Don Levit

          1. Don Levit

            When I have several “authorities,” all disputing what Bruce Webb holds dear to his heart, I think these authorities, combined, have a much more powerful message than Bruce or I could articulate.
            And, shouting from the rooftops doesn’t make the discussion either more civil or accurate.
            Don Levit

        1. run75441


          Bruce and Dale both did a fine job of refuting your positions. In any case, isn’t our diatribe on both of them and SS a non sequitor? The post is about healthcare. The article selected pretty establishes that a 1% annual increase in healthcare costs is sustainable. Both Obama and Romney have this percentage as the cost control for healthcare.

  14. cripes

    @Don levitt
    I hope you’re joking. The driver of excessive health cost isn’t over utilization of care, it’s too much administrative costs and pharmaceutical and hospital price gouging. Reducing actual care to reduce costs defeats the purpose. Medical vs r e can be and is delivered for much less all over the world than this god forsaken gullible. Stop defending profits at the expense of life.

    1. mac

      I noticed in the local hospital emergency room a person with a red shirt that said “scribe” on the back this person followed the Dr around I think and wrote for him/her. I guess the Dr’s can no longer write or enter data.
      When I started working with data processing equipment back in the early 1960’s everyone was sure they would eliminate jobs, looks like the medics have invented one, why can’t the Dr make entries on a tablet?

    2. Don Levit

      I agree that the problem is multi-faceted, including what you mentioned.
      We are at a point in which these price increases cannot continue, unless, of course, the federal government keeps on increasing the subsidies, which apparently will commence in 2014.
      Three of my partners and I recently fininished our 8 months of meetings with Milliman, an actuarial firm, on our patent-pending design to address the cost of health insurance.
      They were forecasting medical trend at 7.5% for catastrophic insurance, which is unlimited benefits above a $25,000 deductible.
      The cost per person is $1,600 per year.
      For famiuly coverage, that is multiplied by 2.7, which is $4,320 per year.
      In 10 years, the cost of catastrophic coverage only, for a family would be over $8,600 per year.
      That type of premium increase simply cannot continue, unless the government and the American public are willing to continue to subsidize such extraordinary prices.
      Don Levit

      1. run75441


        I agree, commercial healthcare insurance is more inefficient than Medicare/Medicaid. This is well documented by the S&P Healthcare Indices.

  15. river

    Long time reader, but haven’t written on here too much, as I am a financial illiterate and find that this blog is above me a great deal of the time.

    That said, the overall point of this blog post seems to be that the CBO is simply basing their long range predictions of health care spending based on the overall increase in spending seen over the last thirty years, but what will actually happen is that the cost increases will taper off naturally because they almost have to . . . you can’t have ever rising exponential growth in a world of limited resources.

    The question then becomes what will happen to stop the cost increases from continuing their upward march, and what will be the consequences of that occuring. After all of us experiencing this exact same thing play itself out in the housing market, I can only imagine how it would play itself out in healthcare. For the last few years, most of my raises have gone to healthcare cost increases, and I would expect that to continue, but after a while, we would switch to a catestrophic insurance program and just not use the services that they are providing. As the costs keep going up, more and more people would stop getting any insurance. Bankrupcies, and cost pressures on medical facilities will start to hit the practitioners (if all of the antelopes are starving, the lions will soon starve themselves).

    1. run75441


      I have not looked lately; but, commercial healthcare insurance has been increasing in cost at ~8% as opposed to ~2.4% for Medicare (S&P Healthcare Indices). The goal is to get both down to 1% through a series of cost initiatives led by Medicare. Obama has pledged to allow Medicare to begin negotiating healthcare industry services.

      The MLR was put in place to control the amount of premiums spent on insurance administration. Within the MLR are risk factors based upon the youngest and healthiest insuree, 150% for smokers (too low), and up to 300% for the elderly. There is also a maximum you will pay as a percentage of income.

      I had a discussion today with Maggie Mahar on the growing costs and the attached article. I am sure she would not mind my posting some of her thoughts:

      “It seems to me that any attempt to forecast that far out is nuts. Wall Street analysts don’t try to predict a corporation’s finance out more than 3 years– maybe 5– and that’s just one corporations.

      They’re talking about healthcare spending– a huge chunk of the economy.They also assume that the aging of America means higher spending.

      A number of countries in Europe that have populations that are significantly older than ours have shown that just isn’t true. (I’m thinking of Germany & Sweden in particular).

      We’ve always been somewhat hysterical about “What will happen when the Baby Boomers Grow Old!!” We’ll handle it because we have to.

      We already know that 1/3 of Medicare dollars are wasted. Cut even 2/3 of that waste, and problem solved. Getting away from fee for service, more efficient systems, refusing to pay for preventable errors, reducing what medicare pays for services we know are not terribly effective; greater use of nurse practitioners, less screening, . . . etc.”

  16. Mike B)

    Healthcare should be produced for use and distributed on the basis of need. The idea that health should be treated as a ‘thing’ is part and parcel of our commodified commonsense under the rule of Capital. It is just another absurdity which we endure in this system of wage-slavery and class rule of the people who own the lion’s share of the collective product of labour.

  17. Greg

    If the patient is Medicare insured then Home Health services are reimbursed 100% by Medicare with no deductibles and no lifetime maximums.

  18. impermanence

    The notion that a nation can afford to medicate, repair, and replace everybody’s body parts is a fairy tale that only corporate boardrooms could have spun.

  19. Maggie Mahar

    Over the past 2 1/2 years, medicare spending has been slowing. Please see http://www.healthbeatblog.com/2012/10/truth-squad-is-obamacare-pushing-health-care-spending-higher-what-will-happen-in-2014/
    And see “Slower Growth in Health Costs Saves U.S. Billions” http://www.bloomberg.com/news/2012-10-16/slower-growth-in-health-costs-saves-u-s-billions.html

    As Peter Orszag and others have pointed out, this
    is Not primarily because of the recession. People over 65 have not, by and large, been losing their jobs. They have not been losing their insurance. Thus, they have little reason to defer care.

    Medicare spending has been slowing mainly because hospitals and others are anticipating the cuts in reimbursements that will be coming with health care reform (Medicare will be reducing annual increases in hospital reimburseements by 1% a year for 10 years–compounded this is a significant amount of money. Medicare will no longer be paying/ for preventable readmissions. Medicare will be moving away from fee-for-service payment. Hospitals will be sharing more of the risk of medical care, as Atul Gawande expalins here.http://www.healthbeatblog.com/2012/10/breakfast-with-atul-gawande/
    With more sharing of risk, hospitals that fail to achieve better outcomes for less seeing their revenues drop . . .
    As they anticipate the cuts, hospitals are becoming more cost-conscious. Some are reducing those preventable readmissions by doing a better job when discharging patients—making sure they understand their meds, have made a follow-up appointment. And then hospitals are following up after they leave the hospital.
    Some hospitals are focusing on hospital -acquired infections– they can be greatly reduced. We know that check-lists work to reduce preventable errors.
    Some hospitals that fail to provide better care for less will lose the “risk-sharing game” and ultimately close. This, too will reduce health care spending. When it comes to health care suppply drives demand. When we have excess hospital beds, more people are hospitalized–even though they don’t really need to be there. (Build the beds and they will come.) We know that a great many hospitalizations are unnecessary. This is part of the waste in Medicare– 1/3 of Medicare dollars are squandered on ineffectiven, often unnecessary care. We can reduce the waste. As hosptials assume more of the financial risk of providing healthcare, they will have no choice.
    And the ACA hasn’t even been fully implemeented.
    Rather than looking at a crude long-term chart of “projected spending” we should be focusing in on what has been happening in the past 2-3 years, and how that is likely to effect future trends.
    We have already begun to break the curve of health care inflation. Trees don’t grow to the sky. What can’t happen won’t.
    And, as Orszag points out,health care spending in the private sector already has begun to slow. See http://www.bloomberg.com/news/2012-10-16/slower-growth-in-health-costs-saves-u-s-billions.html
    Private insurers will be following Medicare’s lead.

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