Putting Health Care Cost Inflation In Context

As the debate about overhauling Medicare continues, you'll hear a lot about health care cost inflation and the growing price of medicine over the next few days. But it's useful to understand what that means: Economist Arnold Kling puts health care "cost inflation" in context:

The term "cost inflation" means a pure increase in prices charged for the same services. Some of that takes place. But most of the rise in health care spending reflects increased use of expensive inputs, in particular fancy equipment and medical specialists.

Right. A lot of people seem to be under the impression that health care cost inflation can be understood in the way that we understand the increased price of, say, George Clooney: Back in his early days as a lesser-known TV star, the price of hiring George Clooney was a lot less than it is today now that he's a much more popular movie star. An unlimited commitment to pay for George Clooney's acting gigs would have grown more expensive as a result. But that's not what's happened with Medicare. 

Instead, it's as if we made an ongoing commitment to pay all George Clooney-related acting fees—and then discovered that he'd gotten into the business of making billion dollar clones of himself. They're all actors too, some with different specialties and advanced new emotional-manipulation capabilities. Suddenly, George Clooney is doing a lot more, and in many cases doing it better—but at much higher cost. 

So it is with Medicare. When the health insurance program for seniors was first designed, health care was a lot less expensive in large part because it was a lot less advanced. As a result, the federal government committed to paying for essentially all of seniors' care, expecting it to remain affordable. It didn't. Now, given the pace at which health spending is growing, that unlimited commitment can't continue.

As Kling says, that leaves relatively few potential responses:

There are always three ways to deal with the increased usage of premium medicine.

a) have government experts ration medical services
b) give consumers fixed amounts of money based on income and medical condition, and having them make their own decisions
c) tell people that neither (a) nor (b) is necessary

In general, the political debate on both sides of the aisle has revolved around C; currently, you can see a lot of it in the awesomely on-message Democratic responses to Paul Ryan's Medicare proposal. Thanks to Ryan's premium support plan, Democrats are more or less united in accusing Republicans of wanting to, in the words House Minority Whip Steny Hoyer "[end] Medicare as we know it and dismantle Medicaid." It's a broken promise charge. The problem, as Arnold Kling says, is that "there is essentially zero chance that the government will keep its current promises" on Medicare. Thanks to the expansion of premium medicine, the unlimited promise of Medicare as we know it is already on a path toward self destruction. The question for policymakers is how to reform it in response. Thanks to Ryan, Republicans have provided a potential answer.