Slowdown in Health Spending Could be at Risk

The Wall Street Journal article, "Slowdown in Health Spending Could be at Risk," hints at a flattening of the U.S. healthcare spending curve. Economists have long made the distinction between a one-time change in price and inflation which is an ongoing process. The classic example involves monopoly power. Breaking up a monopoly pricing scheme lowers prices to the consumer, and it happens quickly. This happened with the introduction of a generic substitute for Prozac. As soon as generic fluoxetine was available, the price fell dramatically. While that, by itself, slowed the growth of healthcare spending, it did nothing to change the underlying trends. The situation is a lot like the hypothetical graph below. The blue line represents an interrupted but not changed underlying trend.

A number of careful analysts have highlighted one-time events that have slowed healthcare spending in the most recent periods. The underlying trends are driven by the aging population, with slowly growing incomes – that is ongoing growth in demand – coupled with limited supply of health professionals. Those underlying factors are only exacerbated by the Affordable Care Act (ACA). The ACA includes a number of potential onetime events to mitigate the underlying trends but it was designed to improve health insurance coverage and not, fundamentally, to lower healthcare costs.

William (Bill) Marder, PhD
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