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Each week, Health Affairs' Rob Lott brings you in-depth conversations with leading researchers and influencers shaping the big ideas in health policy and the health care industry.
A Health Podyssey goes beyond the pages of the health policy journal Health Affairs to tell stories behind the research and share policy implications. Learn how academics and economists frame their research questions and journey to the intersection of health, health care, and policy. Health policy nerds rejoice! This podcast is for you.
It is a truth universally acknowledged that state officials under the conditions of constant financial pressure must be in want of tools to control spending. Of course, health care costs, which are such a big and growing part of states' budgets, represent a key target for such measures. One tool that has emerged over the last decade, implemented by a handful of states, is health care spending growth benchmarks. Essentially, the state sets explicit spending targets for how fast total health care expenditures should grow. These programs and the transparency they bring can spotlight the factors driving growth and inform potential solutions.
Rob Lott:In several states, entities that exceed targets can also be penalized, applying another level of accountability. Seems like a promising idea, but the question remains, are these benchmarks working the way policymakers had envisioned? That's the subject for Health Podyssey Today. I'm here with doctor Keith Marzilli Erickson, professor of markets, public policy, and law at the Questrom School of Business at Boston University. He has a new article in the August issue of Health Affairs, and its title is also one of its key findings.
Rob Lott:Quote, Inflation Distorted State Health Care Nominal Growth Targets Called for Real Spending Cuts, 2022 to 2023. They say the devil is in the details, and here at Health Affairs, we're constantly staring that devil down. And I can't wait to do exactly that here today with Doctor. Keith Marzilli Erickson. Welcome to A Health Podyssey.
Keith Ericson:Thank you for having me.
Rob Lott:Excited to talk. Absolutely. Well, let's start with some background. I just described these state, health care spending benchmarks, and I guess I wanna ask you, did I do an okay job of describing them? And then I guess the broader question is sort of how widespread are they, and are they what what exactly are they trying to achieve?
Keith Ericson:Yeah. I think you did a great job, capturing their essence. They're relatively new. There's about nine states that have them. Massachusetts was the first way back in 2013.
Keith Ericson:And the goal behind them is really about affordability, which can mean different things to different people. It could be slowing health care growth. It could be reducing low value health care spending, but generally making health care affordable, to people. And the tools that these programs have are a combination of monitoring and enforcement, as you mentioned. So diagnosing the problem and then changing incentives in the, marketplace.
Rob Lott:Okay. Great. So generally speaking, what do we know about, how states are doing, states with these benchmarks specifically, in keeping spending in check according to the system that they've put in place?
Keith Ericson:Yeah. So I think it really depends on what you mean, and that's kind of the point of this paper. So I look at these, states and the six states I examine, 2022 and 2023, they all exceeded the benchmark except for one year, Rhode Island didn't, exceeded the benchmark. So in that sense, according to the literal numbers they wrote down, they didn't keep spending below the benchmark. But if you wanna circle back around to affordability, did it remain affordable?
Keith Ericson:I think actually it did, based on policymakers' original intentions of keeping it in line with income growth. And so that's the, other thing about inflation. Right? So if you look at health care as a share of the economy, that's actually been relatively constant, stable, 11% in 2021 and the same in 2023. And that's an affordability success.
Keith Ericson:And the puzzle is how do you reconcile that? Right? So we're exceeding all the benchmarks. These benchmarks were aimed, to keep health care affordable and yet has stayed constant as a share of the economy, and inflation is really the resolution of that puzzle.
Rob Lott:Got it. Okay. Well, before we kinda dig into the findings of your paper, I'm curious if you have a sense of, the policymakers' thinking at the time that they implemented these, benchmarks. Did they foresee that there might be this sort of discrepancy between states, you know, exceeding the benchmarks but not necessarily, you know, suffering from dramatic spikes in affordability or lack of affordability. Is this something that lawmakers kinda saw coming, or is this more of a surprise?
Keith Ericson:I think it's more of a surprise. So when these benchmarks were set, they were all set in nominal terms, like not adjusting or accounting for inflation, but they were set during a period where inflation was relatively low and relatively stable. Of course, 2020 changed a lot of things, and, one of those things that changed post 2020, we saw a big spike inflation. That that was a change from when many of these programs were developed. So I don't think it was foreseen, and, I think it is now foreseeable, and states can adapt.
Rob Lott:Okay. Well, great. So before we dive in, one more sort of definitional question. In your paper, you write that, quote, even sophisticated actors systematically misunderstand the distinction between nominal spending changes and real spending changes. Now I would say most of our listeners are pretty sophisticated.
Rob Lott:I'm, you know, just a simple unfrozen caveman here who's, you know, shocked by your modern ways. And so hoping maybe you can remind us a little bit, about sort of what that means, the distinction between nominal and real spending, and explain why that's relevant to the question you studied.
Keith Ericson:Absolutely. So nominal spending is just, or a change in nominal spending is just a change in the number of dollars being spent. And that or you can measure it. It's a dollar. But a meaning of a dollar is quite different now than, say, a hundred years ago, and that reason for that change in meaning is inflation.
Keith Ericson:And so what a real spending change does is adjust for the value of what a dollar can purchase. It adjusts for the price level in the economy. You know, inflation's a complicated phenomenon. It's affected by monetary policy and demand shocks, but the core idea is really simple. If tomorrow all prices doubled for the items you buy as well as your wages and you buy the same things, that's a big nominal increase in spending, but there's no real change in spending.
Keith Ericson:And that matters in this case because inflation, as we said before, spiked.
Rob Lott:Got it. Got it. Okay. Well, so let's let's look at your paper. You collected data on state benchmark setting processes and targets for six states, and then you sort of used all that information you gleaned as a lens to examine states' performance on those benchmarks.
Rob Lott:So give us some of your top line findings. What did you learn?
Keith Ericson:Sure. I'd organize it around four, key findings. So first is, as we've already mentioned, states almost universally appeared to miss their benchmarks over this period. Right? So they they were blowing past it.
Keith Ericson:People were saying this is unsustainable, unaffordable, and that was a result of missing these benchmarks. But finding number two is if you adjust for inflation, meeting the benchmarks, staying, adhering to those, projected or targeted increases would have actually required real cuts in healthcare spending. So if you think about the historical, previous inflation, these nominal benchmark states set them differently. They're about three, three and a half percent say that would permit about one and a half to 2% real growth. But with the high level of inflation, the average benchmark actually implied a 1.6% per year decline in real per capita health care spending.
Keith Ericson:And that's not I don't think what anybody, anticipated or desired, here. So that was finding two. But then we look at what actually happened to real health care spending growth and it was quite modest. Actual real health care spending growth over this this cohort grew only 0.7% per year on average, less than 1%, which is quite, in line with people's, say, original targets. State experience is different, and that's kind of an average there.
Keith Ericson:And then you put all that together, how are we doing on affordability? The result is that health care didn't increase as a share of the economy. It's about 10.8% or 10.9%, early in this period, and it is ending up actually slightly lower at 10.7% in 2023. So health care is not growing as a share of the economy over this time period. Are the Oh, four
Rob Lott:that's great. Really, really interesting stuff. I wanna, ask you a little more about those, but first, let's take a quick break. Welcome back. I'm here with doctor Keith Marzilli Erickson talking about his, new paper in the August issue of Health Affairs looking at state health care spending benchmarks.
Rob Lott:Now, you know, you've really zeroed in on this question of inflation sort of showing that perhaps, even though the states exceeded their benchmarks, affordability didn't become a dramatically worse problem than it than it was, as a result. And I guess, I'm curious about again, we earlier talked about sort of state policymakers' decisions when they implemented this program. How did they miss this? Or I guess sort of, obviously, we know inflation really spiked in an unexpected way, in the early twenty twenties, but, you know, why didn't they have mechanisms in place to deal with that?
Keith Ericson:So, I wanna get to that, but first, I wanna clarify, I think maybe a little misconception. So health care affordability, we're measuring it this one way, the benchmark way about kind of share of the economy. And that's not the only kind of affordability burden that might be out there. People experience high out of pocket costs. All that's not intended to be measured by the benchmark program, but really are affordability challenges.
Keith Ericson:So I don't wanna say that there are no affordability challenges in the economy.
Rob Lott:Fair point, and I I appreciate you flagging that. I yeah. I'm not speaking about sort of people's pocketbook experience of that, but sort of the those kind of broader state numbers. Yeah. Very macro.
Rob Lott:Clarification. Yeah.
Keith Ericson:Approach here. Right. And so why didn't states account for this? And I think they it was low and stable inflation. As I as we talked about before, even sophisticated people, you know, don't necessarily think about inflation right away when you're trying to adjust for changes.
Keith Ericson:And if you look at other parts of our public policy system, there are lots of places where we don't adjust for inflation even though we could. Right? So, the classic example in in the economics literature is about capital gains taxation. Inflation makes it look like you've had big gains even though there could actually be losses, and that's, something that's baked into our tax system. So smart people don't instantly think about inflation, and that's a challenge here.
Rob Lott:Great. So, your paper looked at, six states in particular, those with these targets. And I'm curious if, there's something we can kind of extract from those six states to kind of broader spending trends in The United States and sort of how
Keith Ericson:we
Rob Lott:approach, national health care expenditures writ large?
Keith Ericson:Yeah. I think I mean, first and very straightforward, we can adjust for inflation in designing these benchmarks. It's a simple fix. I mean, it the technical machinery that goes into measuring health care, spending is actually quite complex. Adding inflation adjustment on top of that isn't impossible.
Keith Ericson:So that's one thing. I think another thing we can learn from this process is that, we need humility. Inflation is like one fix that we can make to these benchmark, programs, but it's really hard to know how much health care spending should, quote, unquote, grow. Right? There's diversity between states and how they've set these benchmarks, and it's not obvious what the right rate of spending growth is.
Keith Ericson:Should it grow, exactly at the pace of economic growth? Should it go slower? Like, TVs have gotten a lot cheaper. Maybe healthcare should get a lot cheaper. Or as we get wealthier and, there's economic growth, do we wanna spend a larger share of our income on extending our lives because that's more valuable than consumer goods?
Keith Ericson:Really hard to get to that answer. And so using these benchmarks as a way of diagnosing the problem as like kind of like, oh, this is a flag. There's something here we should be looking deeper into, think is a really effective strategy. And that's really a monitoring function, and the benchmark like percentage change is really the first step in many of the estate's programs, right? That exceeding that percentage change triggers, you know, further look, detailed understanding of what different health care providers are doing.
Keith Ericson:And I think that's where I think a lot of the value is here.
Rob Lott:Great. So put yourself in, the shoes of perhaps a state lawmaker in one of these states. They get your paper, and their eyes go, you know, big. Oh my gosh. What, you know, what did we do, or what did we miss?
Rob Lott:What's sort of the next step for them, in terms of responding?
Keith Ericson:So I think the the simplest thing we can do is keep all the machinery the same and report both nominal performance and real performance adjusting for inflation right beside that. That doesn't require a complicated technical fix. It doesn't require legal changes. It's it's a matter of how we report these outcomes. And I think that that simple change could be quite informative in helping people understand what's happening, in the economy.
Keith Ericson:And I think that's one of the big goals behind these programs is understanding. Right? So a public understanding, stakeholder understanding, policymaker understanding, we can get that with a simple change in how we report things. Now that's not the only change you could make. So one thing you could do is build an inflation adjustment rule.
Keith Ericson:Right? So, you wanna you might worry as a policymaker in or on one of these boards monitoring health care spending that, oh, you said there's inflation. You add post hoc change things. It's really, like, weaseling out of accountability. And so you might wanna say, well, let's be careful up front and talk about, like, how we might adjust for inflation.
Keith Ericson:And then when it happens, you're like, oh, we're we already had a plan, and this is our plan. So you can do that. I think it's complicated because inflation kind of is a little bit lagged in how it enters health care contracts. So, I mean, it's understandable that that's not how these were launched, but that's something you could do as we've been thinking and seen in the past spikes in inflation. And looking ahead, we may be seeing similar spikes of inflation.
Keith Ericson:And I think the last thing you can do is, you know, affordability is the goal and many ways of measuring affordability. One really important way is how much are we spending on health care as a share of our resources, as a share of the economy, and judging long run spending relative to that. And that actually, if those were the key graphs that we've been, we're we're showing for a long time, it would be like, oh, it's been pretty stable over this period, and that's a very different message. So, those are the three things I would really do.
Rob Lott:Great. Now tell us about your thinking as a researcher. Are there outstanding questions in this space that you'd like to look into going forward or questions that maybe we'd love to answer but we don't have the data or the tools to answer right now?
Keith Ericson:Yeah. I mean, I think of the there's a big debate about the role of enforcement and the kind of financial penalties or not that should attach to this and understanding how the what effect those programs have, how to design them well if you're going to do them, how to change the incentives to get them right for, health care providers, it's a complicated question. If it was easy, we would have solved it. And that's something, you know, is definitely worth looking into and thinking carefully about. And I think another one is the role of discretion versus rules in benchmark programs, right?
Keith Ericson:So there's a trade off because healthcare is really complicated and you wanna get things right and that requires a lot of expertise. But on the other hand, you know, unchecked discretion also has big problems in terms of how you, if you have real stakes and accountability, you need more rules and less discretion. Discretion. So that I think figuring out that trade off is another thing that, as a researcher, like to know the implications of each of them.
Rob Lott:Great. Well, any other sort of key findings or surprises that you encountered in the course of this work that you wanna flag for our listeners?
Keith Ericson:I think that's a good question. I think if we're going to monitor health care spending, I think we wanna do it well and do it right, and adjusting for inflation is one thing, and that I think that we we miss this, should give us a little that humility that, oh, we need to be careful about how we intervene here. We wanna improve outcomes for people. We wanna make sure that it's affordable, and we want to make sure we get it right, and that that's it's hard to do because who knew health care is very complicated. Well,
Rob Lott:a great note to wrap up on. Doctor. Ericsson, thank you so much for taking the time to speak with us today. Really appreciate your work on this article, and look forward to continuing to read your work in the months and years ahead.
Keith Ericson:Thank you for having me.
Rob Lott:And to our listeners, thanks for tune tuning in. If you enjoyed this episode, please recommend it to a friend, leave a review, and, of course, tune in next week. Take care, everyone.