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See the Curve Bend

Republicans pounced on last week's report from the official Medicare Actuary, saying it vindicated their argument that health care reform would cause health care spending to explode. Rather than bend the curve down, as Budget Director Peter Orszag likes to say, it would bend the curve up.

But while the Actuary did in fact predict reform would mean spending slightly more in 2019 than we otherwise would, it did not suggest that the curve was bending up. If anything, it suggested the curve would bend down, albeit only a little.

On Thursday I explained why. Simply put, reform would unleash two major sets of changes. One, a strengthening and expansion of health insurance, would cause health care spending to rise, since it would mean people consume more health care overall. The other, a set of reforms to Medicare and the private insurance system, would cause health care spending to fall, since Medicare would become more frugal with its reimbursements and the incentives for purchasing more expensive private insurance would diminish. (These changes, in theory, should lead to care that is both lower in quantity and higher in quality--but that's a discussion for another time.)

Sometimes pictures tell this story better than words. So I've drawn two. And if you'll forgive my weak graphing skills, I think they make the point.

The first uses data from the Actuary's report on overall National Health Expenditures (NHE), which is total money we'll be spending as a country on health care. The blue line shows what NHE would likely be if we did nothing. The green line shows what the NHE would likey be if we pass the Senate reform bill.

At first glance, the lines look totally indistinguishable. That's because total NHE really doesn't change that much in one way or another over the first ten years we're using for planning. For better or worse, the total level of spending just isn't going to vary a huge amount one way or the other--at least during this time frame.

But that's why Orszag and others have always used the phrase, "bend the curve." As a practical matter, it would be difficult to take a huge chunk out of medical spending in the span of ten years, because of the disruptions it would cause. The key is changing the trend line, so that, many decades hence, we're not spending as much as we otherwise would.

What we want to know, in other words, is whether the annual change in health care spending is increasing or decreasing--and doing so in any clear way. You can see that if you look really, really closely at the graph. Or you can simply calculate the rate of change itself and graph that separately, which is precisely what I've done here:

Interesting, huh? Under the reform scenario, the annual rate of change in health care spending is lower for a few years, spikes up, and then comes back down--so that, after ten years, it's again lower than it would be otherwise, although the gap is closing in the final years.

It might seem like a totally random pattern, until you remember what's happening with reform and when. The cost-cutting measures start right away; the expansion/strengthening of insurance starts in 2014. The Kaiser Family Foundation's Larry Levitt, who reviewed the graphs at my request, explains the significance:

Reform lowers the rate of growth of health spending for a few years, primarily with Medicare savings. Then the rate of growth jumps up above baseline as the uninsured are brought into the system (the effect is really a one time increase in spending, but it shows up as big rates of growth for a few years as the uninsured are covered and use more services). Then things settle down back to the point where the rate of growth is below baseline, reflecting the effect of Medicare savings and the tax on high cost insurance plans.

You could make a legitimate argument that the curve should bend down more, something the president and Congress could do by pushing hard on some of the cost-cutting measures that have been watered down through the legislative process. But you can't make a legitimate argument that the Actuary projections--which, remember, are based on pretty conservative assumptions about the potential of specific reforms to save money--prove the curve bends up. If anything, the projections show the curve bending down.