We don’t spend enough on health care?

Craig Karpel writes today in the Wall Street Journal that we don't spend enough on health care.  Basically, he writes that as the economy has evolved, we have gone from focusing on food (in the agricultural and mercantile revolutions) to clothing (in the industrial revolution) to shelter (in the late 20th century and this decade).  It is only natural that we would now turn to focusing on our health and longevity.  It's an interesting argument, if different from the viewpoint I have expressed in my previous health care pieces.

One reason that I do believe it is in fact unfair to compare the cost of care in the US to that in other countries is that the rest of the world free rides off the medical innovation that mostly takes place in the United States.  The entrepreneurial medical culture in the US incentivizes the use of advanced technologies, which eventually spread throughout the rest of the world.  Other countries use their monopsony buying power to push down prices so that, in effect, American workers subsidize the health of the rest of the world.

The benefit of spending money on health care versus other items like consumer goods or petroleum is that it is a domestic industry.  In addition, the accumulated R&D that takes place in the United States translates to a large amount of net exports.  Better health care and advances in longevity should also allow for a long term rise in the average retirement age, increasing the productive life of an American worker and boosting the long term potential growth rate of the economy.

The health care conundrum is the classic "on the one hand, on the other hand" situation that permeates economics.

Health care is killing the American worker

In the "everything is connected" category, I was reading Michael Santoli's column in Barron's this week and he brought up something interesting:

"There may be no position of more comprehensive agreement than that the U.S. consumer is shot — earning less, spending less, saving more, repayng debt. How many times have we seen the same numbers trotted out, about how consumer spending jumped from a long-term average of below 65% of gross domestic product to a recent 70%, and must fall back; how household debt soared from 64% of GDP in 1995 to 100% of GDP, and must retrench; or how the savings rate that used to average 7% to 11% before 1992 has just lately popped from zero to 6.9%?

It's all true, and should be expected to restrain spending and economic activity over time. But the nuances within the numbers — and the unknowable trajectory and degree of adjustment — helpfully complicate the picture.

The consumer as 70% of GDP needs a footnote. Almost all the growth in personal consumption as a share of the economy has been health-care spending — even though government covers half of health expenditures. As strategists at Citi and Barclays have noted, personal spending ex-health-care as a share of GDP has been flat for decades. This suggests there may not be too much frivolous shopping to cut out."

I'll admit expecting consumer spending as a percent of GDP to fall has been one of my core economic theses. So I pulled the numbers myself. And lo and behold, the economists at Citi and Barclays are mostly right.

If you exclude medical care, personal consumption as a percent of GDP is only slightly above where it has been since the early 1960s and is below where it was in the 1950s. Half of medical care expenses are paid for by the government and close to half are paid for by employer-based insurance. Please note that these statistics are for medical services. Drugs and medical devices are classified as goods.

This chart really emphasizes my point:

Another statistic that's often bandied about is how the median worker's inflation-adjusted wage has stagnated since the early 1970s. The stat is usually cited by the left as proof that greedy corporations have been raking in all the profits and holding down workers' pay or that all the economic benefits have been flowing to the rich. It turns out that what has actually been happening is that the rightful fruits of worker's productivity gains have been Hoovered up by the medical-industrial complex.

The Clinton era is hailed by the left as a time when more progressive taxation and such finally allowed the median worker's wage to rise after its long stagnation under Nixon, Reagan and Bush. It turns out, the 1990s was also the age of the hated HMO that "rationed" health care. Health care as a percent of GDP fell slightly from 1993 to 1999 and the average worker's wage surged.

Source: Minneapolis Fed

The following calculation, which includes benefits, shows that American wages have actually risen quite a bit since the early 1980s.

In other words, HMOs created the great Clinton-era wage boom.

Not to pick only on the left. The right (or at least the Wall Street Journal editorial page) is constantly raising the bugaboo of "health care rationing" as the threat of Obama's proposed health care reform. Of course health care needs to be rationed. What else doesn't get rationed in some form? The big question is how to ration health care. Is it done by insurance companies, like under the HMO model? Is it done by the government, like in Canada and Europe? Is it rationed by changing incentives for doctors and hospitals, like what was suggested in my previous health care post?

If health care doesn't get rationed in some form or another, Americans' standard of living (ex. health care) will stagnate. For a while Americans borrowed against their houses to pay for increases in their standard of living. That option is now gone.

Our expensive health care system is robbing American workers of the fruits of their labor. Bring down the cost of health care and more workers will be able to afford coverage. Bring down the cost of health care and more workers will receive pay raises. Bring down the cost of health care and the US can close its trade deficit. Bring down the cost of health care and reduce the future Medicare liability. Bring the cost of health care and reduce US indebtedness to the rest of the world.

I can imagine no more important issue facing voters today.

Must-read health care article from the New Yorker

Everyone thinks we need to do something about our health care system, but there's not much agreement about what needs to be done.  I am far from an expert in this field, but have come across some interesting articles recently.  I am a big picture guy, mostly, so I'll start from the top.

The Democrats generally focus on providing coverage for the uninsured and the Republicans generally focus on the high cost of our system (if they aren't defending the status quo, which they also do).

This chart from the Economist tells us alot:

On the basic question, the Republicans appear to be more correct, the US clearly has a problem with costs, without providing better outcomes.  The fact that there is a high number of uninsured is a symptom of the fact that health insurance is expensive, not the core failing of the US system.


What is different about the US system that results in high costs?  Here are some possiblities:

  • We waste money on the bureaucracy of private insurance – maybe, but the chart shows that we spend as much as or more than other countries publicly, even though most people get their insurance through the private market…besides since when are government bureaucracies known for being efficient?
  • Other countries free ride on our innovation – true, but I doubt that makes up the whole difference
  • Other countries don't have large medical malpractice claims – also true, but also unlikely to make up the difference
  • Since everything is free, people overconsume – true, but it is free in other countries too, and besides, do consumers really stand a chance of figuring out what they should pay for procedures, how to negotiate prices and what is necessary and unnecessary?
  • Our care, for those insured, is better – this is true in some ways…we are more likely to make use of cutting-edge technology but our outcomes are not necessarily better in key measures
  • Other countries ration – also true, but they do not necessarily have worse outcomes…besides everything else in the world gets rationed in some way, why not health care?  Since when do we expect to get unlimited free anything?

This article from the New Yorker looks in depth at the cost issue by comparing two Texas cities with similar demograpics, similar health outcomes, but vastly different healthcare spending per capita:


Supposedly, Obama is making this article required reading for his staff.  Obama talks about the cost problem all the time, like he totally gets it, but then he rolls out a plan that involves spending over a trillion dollars more than we already do.  It's mindboggling.  Why, Obama, why???

Anyway, what is the punchline?


The system incentivizes doctors to order expensive procedures, incentivizes the use of specialists, incentivizes the use of expensive drugs, incentivizes the use of tests, incentivizes the use of expensive technology, and disincentivizes the use of general practictioners, collaboration between doctors and preventive care.

The difference between the two Texas cities is that one has an entreprenurial culture among doctors whereby they rack up huge costs and the other doesn't.  Supposedly, if the high cost areas of the US were brought down to the levels of the better low-cost areas (like the Mayo Clinic), the gap between the US and other countries would vanish. 

I do suspect, however, that there is a vast medical-industrial complex that will fight this sort of change, thus we will end up just poring more slop into the trough for the health care pigs to feed off, with little actual reform.

As an final note: an article in this week's BusinessWeek highlights the medical-home model that may serve as an antidote to our health care boondoggle:


On the question of how do we incentivize for outcomes (quality) rather than quantity of care?  Honestly, I have no idea.