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Peter Orszag: Economy Can’t Be All That’s Slowing Health Costs: Noted

Peter Orszag: Economy Can’t Be All That’s Slowing Health Costs:

A new set of projections released last week by Medicare’s actuaries… suggests the deceleration in the growth of health costs we’ve seen over the past few years is ephemeral… [due] to the “lingering effects of the economic downturn and sluggish recovery” and to increases in cost sharing. Both of these explanations have serious shortcomings….

A macroeconomic explanation is difficult to reconcile with the slowdown in Medicare, because there is no reason to expect Medicare--a subsidy that goes mainly to retired people--to be much affected by the economy. What’s more, the econometric methodology itself, which I have long disliked, was debunked in another paper released last week. Amitabh Chandra and Jonathan Holmes of Harvard University and Jonathan Skinner of Dartmouth… when they made even modest changes in this type of model, the results changed drastically… econometric results are untrustworthy if small specification changes… substantially alter the results….

I’m willing to put some pride, if not money, on the table. The actuaries project that, in 2014, Medicare will grow by more than 5 percent. I bet it will be less than that…. It is also encouraging that the growth in total compensation in the health sector has fallen to between 2 percent to 4 percent annually over the past three years, from 5 percent to 8 percent a decade ago…. Doug Elmendorf, the director of the Congressional Budget Office, summarized the situation trenchantly last week. In comments on the Chandra paper, he noted, “The slowdown in health care cost growth has been sufficiently broad and persistent to persuade us to make significant downward revisions to our projections of federal health care spending.”… The past several years have been encouraging. But we should push for further steps--especially, moving Medicare away from fee-for-service payments--to keep costs decelerating.

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