Monday, September 14, 2009

Health care inflation 

Yes, it's me who did that spreadsheet that lead to Ed's Obamateurism of the Day today. What started as me answering a Friday night email became two posts.

I'm not at all sure what the President means by the $4 trillion claim. My assumption was that it's an "infinite-horizon" estimate. Not too long ago liberal think tanks like the Center for Budget Policies and Priorities was nicking the Bush Administration for using similar methods to discuss the cost of delay for fixing Social Security. Since the infinite horizon deficit in Medicare is $36 trillion, what President Obama's calculus would have to say is that we can reduce this to zero just by cutting the growth rate of national health expenditures by 1%. (Again, we have to be careful about the share that goes to government versus employer versus individual, but let's suppose some set of redistributive taxes takes care of getting that reduction into government's hands.) Does that seem reasonable?

If the size of that number hasn't given you pause, Dallas Fed President Richard Fisher's speech from last year should.

One other caveat: It is impossible to assume, as I did, that the rate of growth of health care spending can continue to rise that much faster than GDP as a whole, otherwise you end up with health care spending more than 100% of GDP. It has to decline over time anyway, as the CBO has argued. I could perhaps impute some regular decline value and then speed it up, if that's in fact what Obama meant (he does not say this, but I'm trying to find as generous an interpretation of his comments as possible.) They assume that private spending on health care falls faster than Medicare and Medicaid, and Medicaid falls faster than Medicare because states share Medicaid costs and will have more trouble shifting money into that program, thus restraining it. Obama's proposals have to do better than that to generate the expected $4 trillion.

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