Has Obamacare fixed US health care inflation?

By Christopher J. Conover of AEI.

"Here we go again. What is it about Obamacare that inspires its fiercest supporters the cherry-pick evidence as proof it is “working”?  The latest entrant in this never-ending contest is Matt Phillips, who trumpets the news “Obamacare fixed U.S. healthcare inflation.”  If true, this would be no mean feat since as we’ll see, medical inflation has outpaced general inflation rather regularly over the past half century, sometimes by as much as 6 percentage points in a single year.  But as we’ll also see, giving Obamacare credit for the recent slowdown in health prices is quite a stretch for two reasons: first, it fails to account for the fact that this downward trend was clearly visible years before President Obama was even elected president; and second, it fails to account for what was happening to the general economy and general inflation during the same time period.

The Purported “Proof” Obamacare Has Fixed U.S. Healthcare Inflation

Let’s start with Mr. Phillips’ evidence, shown in this chart:

Being a born skeptic, I’ve gone to the same data source and get a slightly different picture.[1]

The difference is that Mr. Phillips focused on the price index for health services (hospitals, doctors, nursing homes etc.) whereas I used the index for all of health, which includes pharmaceuticals and medical equipment.  His measure essentially misses 20% of national health spending.  If we’re trying to figure out what’s happening to healthcare inflation, I cannot see any good justication for leaving out one fifth of the health sector. So in what follows, I will rely on my numbers rather than his.

The Post Hoc Ergo Propter Hoc Fallacy

Anyone who has taken Logic 101 knows of the post hoc ergo propter hoc fallacy. The mere fact that health inflation is how at one of its lowest points on record and that this has occurred 4+ after Obamacare was enacted is certainly no proof that Obamacare “caused” this. Put another way, correlation is not the same as causation.  And in fact the very data Mr. Phillips uses to make his case tend to undercut it. If Obamacare is the cause of this remarkable slowdown in health inflation, then how does Mr. Phillips explain that this slowdown clearly began in 2003-2004, before President Obama had even been elected to the Senate?  The fallacy becomes clearer when we examine the pattern of general inflation.

That chart tells nearly the identical story! In fact, it tells an even more compelling story 

That is, apart from the huge dip during the most recent economic slowdown, measured inflation is at its lowest level ever since 1960, outpacing even the level achieved during the 1961-62 recession. Is Mr. Phillips going to give Obamacare credit for that too?  If so, it’s quite an amazing law.

But even if we’re only going to more modestly give Obamacare credit for the slowdown in health inflation, does that mean Obamacare gets the blame for the recent uptick in this metric?  Admittedly, we do not yet know whether this is a temporary spike or the start of a more enduring upward trend. What we can be certain is that it is far from clear that U.S. healthcare inflation has been “fixed.”

What Has Happened to “Excess” Medical Inflation?

Mr. Phillips ignores the reality that medical inflation is driven to a large extent by trends in general inflation. When general inflation is high, so is medical inflation. No surprise there. So what really matters is the extent to which medical inflation is outstripping general inflation. My final chart shows what happens when we subtract general inflation from medical inflation.

 

This provides a more realistic (and I would argue, far less rosy) picture of Obamacare’s impact on medical inflation. Admittedly, there is a lot of year-to-year variation, but in this chart, we can see even more clearly that a general downward trend in gradually  diminishing “excess” medical inflation began well before President Obama’s arrival in the Oval Office. And since Obamacare was enacted, at best this metric has been flat. And at worst, one can detect a slight upward trend rather than a continuation of the downward trend that had been in place for at least a half decade for President Obama  took office.  It’s a rather sizable stretch to point to this chart and argue it is proof that Obamacare has whipped healthcare inflation. One might generously say it has not made things worse on the medical inflation front. But even that comes with a caveat in light of  the sharp upward spike in January 2015. This may well turn out to be only a temporary spike, but the point again is to emphasize that any conclusion that Obamacare has tamed the medical inflation monster really cannot be supported by the evidence at hand.

Update #1

In today’s Upshot column at NY Times, Austin Frakt has an excellent deep dive into the various strands of evidence that relate to long-term trends in health costs. Note that he is focused on health spending not just medical prices. Nevertheless, his piece is well worth reading for anyone wishing to get a greater understanding of whether to expect that we have “bent” the health care cost curve in a downward direction.

Footnotes

[1] I’ve used the price index for health reported in Table 2.3.4U. Price Indexes for Personal Consumption Expenditures by Major Type of Product and by Major Function (found under Section Two. Personal Consumption Expenditures at the link provided). Mr. Phillips evidently used the price index for health services found in the same table. However, that index only includes outpatient services, hospitals and nursing homes and does not include pharmaceuticals, medical devices or other medical products. Collectively, the excluded categories account for 20% of health spending as measured by BEA. The broader health index I used includes these missing components."