Why Americans want to spend more on health care

The economic fact is that the amount we spend on health care as a percentage of national income will continue to rise over the next 50 years.

Last week, the Supreme Court upheld the Affordable Care Act (ACA). Now, the battle moves from the courts to electoral politics, with arguments about whether or not the ACA will reduce health care costs compared to what they would have been without it, or whether repealing the ACA and substituting alternatives such as health care vouchers would encourage increased efficiency and lower costs.

However, such debates are fundamentally flawed. The economic fact is that the amount we spend on health care as a percentage of national income will continue to rise over the next 50 years.

graph of us health care spending over timefrbsf.orgHealth expenditure in the United States.

Health care spending as a percentage of GDP rose in all industrialized countries over the past 50 years. (See, for example, the graphs here. ) This indicates that factors common across countries, rather than differences in delivery systems, drive this trend. For instance, some argue that U.S. health-care spending rose from 5 percent of GDP in 1960 to 18 percent in 2010 because of problems unique to the United States. But this doesn’t explain why all other countries experienced similar increases in their spending shares.

chart of health spending in non-us industrialized countries over timefrbsf.orgHealth expenditure in other industrialized nations.

Joseph Newhouse of Harvard University first addressed this problem 20 years ago in an article in The Journal of Economics Perspectives.  He wrote, “Suppose that some magic wand could almost costlessly get rid of medical services whose marginal benefits were less than their marginal cost.”  That is, imagine no unnecessary procedures, no ineffective treatments and all waste was wrung out of the system. He went on to argue that what he called “the march of science” would inevitably push up the share of our national income going to health care.

March of science

Why?  Because the march of science increases health care spending in two ways.  First, medical science advances through expensive new types of physical capital such as CAT scanners, MRI machines and surgical robots. Second, medical science marches on through new procedures that may not require much expensive capital but do require increasingly specialized (and pricey) physicians, nurses and other medical professionals.

But Newhouse’s argument is incomplete. Charles I. (Chad) Jones, an economist at Stanford University, pointed out: “People do not have to purchase the new medical technologies if they don’t want to, and, in fact, people do not have to invent them in the first place if they are not valuable. Given that, it must be the case, at some level, that the increasing share of GDP expended on health care reflects people’s preferences.”

In particular, Jones made a distinction between goods and services (such as cars, televisions, clothing, movies, concerts) and years of life. Goods and services are subject to something economists call “diminishing marginal utility;” in plain English, more stuff is better, but the extra satisfaction that we get from every additional car, TV, shirt or concert gets smaller and smaller.

Income elasticity

This can be measured using something economists call income elasticity. Income elasticity measures how much more of a good or service a person will buy if their income goes up by 1 percent. For most goods and services this number is less than 1; that is, if income rises then people will buy more of most goods but they will increase their purchases by less than 1 percent. 

Years of life are different. If you have a medical procedure that extends your life, then the first, second, third and however many extra years you receive are all equally valuable.  So if your income rises by 1 percent, you will increase your spending on medical care by at least 1 percent, and possibly more.

Jones, along with Robert E. Hall (also of Stanford) embedded this idea in an economic model and found that it does a good job predicting the path of health care expenditures from 1950 to 2000. Further, they show that if this is true, then the share of GDP we devote to health care could easily rise to 30 percent or more over the next 50 years as people choose to spend more on health care to obtain more years of life.

Thinking about the rise in medical spending this way puts health care policy in a different light. People want to live longer, better lives, and they are willing to pay for it. They don’t want more stuff, they want more life.

Thus it might be the case that in economic terms, Americans want a larger percentage of their spending to be devoted to health care, and as long as the extra benefits of greater medical spending exceed the costs people will be willing to pay for more care. This could be true both in their private spending decisions as well as in terms of government spending.

Comments (20)

  1. Submitted by Neal Rovick on 07/06/2012 - 10:42 am.

    Graphs with unequal scales are deceptive.

    As a percent of GDP, US pending multiplied by a factor of 3.2 in the period 1960 to 2002.

    Germany, France, Japan and UK multiplied by a factor of 1.8, 2.5, 2.6 and 2.0 respectively (as close as I can read the graphs).

    That is a substantial difference in my book, they grew at a rate 58% to 80% of the US rate.

    Picture a graph with the US, Germany, France, Japan and the UK, all on the same set of axes. The US starts out in 1960 between France and Germany, with spending at about 5%.

    The US would end up in 2002 at a point twice as high as France.

    Those are substantial differences in growth rates (hurrah for the private insurance and the ability to control costs!! )

    And to put it in historical perspective, in 1960 all of the other countries on the graphs were still recovering from the devastation of WW2 that ended a mere 15 years prior. If any peoples wanted to spend more on health care, it would be the people most deprived of it by the deprivations of war within their own lands.

    So unlike a real demand to spend more, it was the profit drive of the insurers, medical providers, medical device makers and drug sellers that drove the cost up in a stealth way. The rise was masked by insurers that ran their charges mostly through employers, with employees never fully appreciating that the cost of insurers to the employers rose from a thousand a year to a thousand a month in the intervening years.

    And why would the insurers really stand in the way of cost increases? Their income is based upon the volume of dollars passing through their hands. It is no oddity that the larges insurer show the greatest profits. As for the suppliers, device makers and drug makers, profit is the goal, as it is for any other business.

    As for the government, government actions also disguised the increase in medical expenses. Even a Republican (GWB) passed an expansion of Medicare that has impacted fiscal balance in the goal of reducing the impact of costs on citizens. However, there has never been a consistent oversight of rising costs and a direct attack on those costs–it all has been a matter of using government spending to reduce the effect of the costs. For years, Medicare and medicaid was specifically prohibited from investigating suspicious payment patterns to providers.

    So, I really cannot believe that there was an increased demand on the part of individuals. It is waste in the insurance system, greed and profit on the part of suppliers and providers and an (until recently) an invisible and low-impact payment system.

    And there is real evidence now that more people are putting off care and procedures because they simply can’t afford it in these days of no or low insurance and high deductibles and copays.

    It was never a real market because the buyers never realized they were buying.

    • Submitted by Joseph Dobbert on 07/09/2012 - 08:22 am.

      Not only is his graph deceptive

      ..price elasticity is use to measure what quantity of a good or service you’re willing to buy as the price increases / decreases. It’s a measure used to maximize price (the maximum price at which you can sell the maximum profit). It is NOT appropriate in this case because our desire to buy the product isn’t driven by price, it’s driven by need. We have to pay doctors when we’re sick. We don’t choose to buy “x” units of service at “y” price.

      This argument is flawed, the graph is deceptive, and the concepts misapplied. Shame on MinnPost for publishing it!

  2. Submitted by Dimitri Drekonja on 07/06/2012 - 10:45 am.

    I think there is a fundamental problem in this analysis, which assumes that patients are making active choices with their health-care dollars.

    In some cases, they are. When a person opts to have a LASIK procedure performed so that they can see without glasses, that is an active choice.

    But in many, and I would say most, patients are not choosing for more care/spending thinking that they will get more or better life. They do things either because their doctor tells them they should do so, or because they have something wrong that they want fixed.

    An example of the first is when a doctor (or mid-level-provider) recommends treatment of high-blood pressure. The patient likely is unaware of it and can’t feel it, but will go ahead and do so because they trust their doctor is making a recommendation based on sound science. But I have yet to see a patient ask for the pricier drug to treat hypertension; they want one that works well. Interestingly, one that works well is dirt cheap, and yet many people are on much more expensive ones– this is not explained by the patient desiring to spend more money for more life, but rather by good marketing by pharmaceutical companies.

    Many other medical decisions are driven by need– when you bring your kid having an asthma attack to the emergency department, cost is usually not something to be discussed. Parents see their kid struggling to breath, and they want it fixed. There is no cost/benefit ratio going on here, nor is there a desire to seek more expensive care– they want the care that will fix the problem, not the most expensive one.

    Ultimately, patients have little insight into costs, partially because costs are so fluid (one insurer might negotiate a far better deal than another for a certain test or drug), and partially because it is hard to comparison shop in medicine. Say you have chest pain: you call up a few ER’s and ask for an estimate on what this is going to cost. The correct answer is, who knows? Maybe it’s clearly a case of bad heartburn, in which case a simple antacid and observation will do the trick. Maybe it’s a blood clot in the lung, in which case there will be a CT scan, blood thinners, likely admission to the hospital, etc, or maybe it’s coronary artery disease that requires immediate surgery, in which case you’re looking at 10’s of thousands of dollars. This uncertainty as to what is going on at the moment you present for care is what makes the idea of patients “choosing” to spend more so unrealistic– yes, they “choose” more care by showing up with a problem, but they have no control over what will all be needed, or what it will cost.

  3. Submitted by Neal Rovick on 07/06/2012 - 10:51 am.

    A graph which clearly shows that the US is an outlier with respect to other countries is shown in this graph (originally from OECD):

    http://en.wikipedia.org/wiki/File:Health_care_cost_rise.svg

    Spending and growth rate is substantially higher in the US.

    (Maybe it’s just because we are just so exceptional !)

  4. Submitted by Ross Williams on 07/06/2012 - 10:53 am.

    “. For instance, some argue that U.S. health-care spending rose from 5 percent of GDP in 1960 to 18 percent in 2010 because of problems unique to the United States.”

    Compare this to the two graphs above which end in 2002. The other countries increase have flattened for the last 20 years, while the United States increase steepened. And those trends clearly continued in the last 10 years.

    “But this doesn’t explain why all other countries experienced similar increases in their spending shares.”

    It doesn’t explain it, because it isn’t true. There is nothing remotely similar about the lines on those graphs over the last 25 years.

  5. Submitted by mark wallek on 07/06/2012 - 10:59 am.

    Spun up for profit

    The medical dollars in america go primarily to the adminsitrative side, with CEO, CFO and whoever else taking up the lions share. Until we rid ourselves of these monolithic “healthcare” entities we will continue to pay huge sums for much less costly care. It’s a wonderful experience knowing that a simple hernia surgery will bankrupt me wheras my canadian counterpart need not be concerned. All the promise of this nation is being sent into the offshore accounts as quickly as it can be. Why, even Mitt Romney has them. God bless profit, and let the citizens fend as they can.

  6. Submitted by Ray Marshall on 07/06/2012 - 11:18 am.

    Mandatory Medical Insurance

    Everyone seems to think it is wonderful that the healthcare legislation requires that all of us should pay for medical insurance if our employer does not provide it.

    Just how many, do you suppose, who don’t have medical insurance have a few hundred dollars that they are socking away in savings accounts each month that they can use to pay for a health insurance premium?

    I’d bet that the number would be 0-5%.

    Are veterans who are getting their medical care from the Veterans Administration exempted from the mandatory insurance requirement? I’ve never seen anything mentioned about our vets.

    • Submitted by mark wallek on 07/07/2012 - 10:22 am.

      Vets are special

      Vets have been tossed about like a political football forever. Give the vets what we promised: healthcare without question, whatever is needed, in exchange for what was given to the nation, No issues. Problem solved. The fact that there are issues says somebody is not being honest. Can anyone find healthcare, esp. folks with pre-existing conditions, at $381 a month? Hardly, yet given how the industry has spun up prices to support high level administrative lifestyles, my employer cannot find affordable insurance, so we have the “fund” instead. I am most grateful that the company does what it can, but at one time we could afford decent coverage. The increased costs have little to do with actual medical issues and more with profit mongering. Just look at Fairview Health “Services” if you want to see a classic example.

  7. Submitted by James Hamilton on 07/06/2012 - 12:44 pm.

    End of life care

    is a major driver in the rising cost of medicine in the U.S. We have the ability to extend life by days, weeks, months and occasionally years, but only at great cost. Unitl we as a society address this issue, we will never get a handle on costs. My brother, for example, was given the choice of extending his life for a few months at great cost with radiation and chemotherapy, but no hope of a cure. All that could be done was stretch out the process of dying, which he chose not to do. He spent his final days in a residential hospice setting, where he could be cared for by family and professionals, as appropriate.

    For an example of the insanity of it all, see this:

    http://www.mercurynews.com/cost-of-dying/ci_19898736?source=pkg

    • Submitted by Pat Berg on 07/06/2012 - 05:24 pm.

      Death panels!

      Hey now, don’t you dare be talking about end of life care! Didn’t you get the memo? Those kinds of discussions mean the imposition of “death panels”.

      No wonder we never get anywhere with conversations that really dig into the issues. Sigh.

  8. Submitted by Richard Schulze on 07/06/2012 - 06:10 pm.

    Countries that invest the surpluses of their workers in the old are in decline. Those that invest those surpluses in the young will thrive. When we sacrifice education and infrastructure to pay old age pensions and medical bills, we place ourselves inexorably on a downward spiral.

    Does this mean we abandon the aged, put them out on an ice-flow to die out of our sight? No. It means that we must make difficult choices to treat maladies with public dollars when those treatments result in additional healthy, productive years of life, rather than a few months of painfully delayed decline towards death. It means that the elderly should be expected to work, albeit with fewer hours in less demanding positions, until death is fairly close at hand. Retirement cannot be a state-subsidized 20 year vacation in the sun if we are to progress as a society. If the baby boomers want to break with their established pattern of self-absorption and actually do something worthy, they’ll embrace limiting the transfers of wealth to the elderly, focusing on the children instead. I’ll not be holding my breath waiting for this to happen.

    I also find the expansion of the health care industry vaguely unsettling. I keep thinking of hospitals like the pyramids of ancient Egypt – monolithic transfers of wealth to the dead. It is not exactly rational, but then again, what are the fiscal multipliers in the health care industry?

  9. Submitted by Gary Doan on 07/07/2012 - 03:56 pm.

    The government wants Americans to pay more for health care

    If the government would stay out of health care, it would cost less. Look at laser eye surgery, it keeps going down in price, because there is competition and its not covered by government programs. The government plays favorites, eliminates competition and the bigger it gets, the faster the costs grow.

    • Submitted by Ross Williams on 07/08/2012 - 09:34 pm.

      Laser Eye Surgery

      The cost of eye surgery isn’t going down.

      And “the government” doesn’t “eliminate competition” for health care services. Most health care is provided privately and paid for with private insurance. Of source “government” does do some things to limit competition, like requiring a medical degree to practice medicine. There is no doubt health care would be cheaper without government regulations. But I doubt very many people are prepared take that idea seriously..

  10. Submitted by Victoria Wilson on 07/07/2012 - 05:40 pm.

    The social component of health care

    “Jones made a distinction between goods and services (such as cars, televisions, clothing, movies, concerts) and years of life.”

    The popularity of end of life directives seems to betray Jones’s marginal utility distinction. If each additional week, month or year of life was of equal quality there would be no need to entrust your most dependable offspring to shut down ventilators or withdraw feeding tubes.

    The distinction between banal goods and services and health related goods and services is that the tug of traditions, customs and family preferences strongly guide each of the latter’s transactions. A wonderful portrayal of this can be read in The Spirit Catches You and You Fall Down (Fadiman). How people choose to manage their health is not just influenced by cultural identity or religion. People may follow the fitness oriented approach to health. Cynics of such an approach will point to the marathon runner who contracts cancer at 40 and choose to follow the preemptive theorists approach to care. And then again you can find a never-go-to-the-doctor- unless-you-are-dying approach to care.

    With a country as large and diverse as ours, the fear is that establishing universal rules will meddle in the choices and decisions of many. Hence formalizing arrangements with laws and policies will promote waste. Waste attracts thievery. Thievery is hemmed back by regulation. And thus the expense of furthering our nation’s health becomes much more costly.

  11. Submitted by Richard Schulze on 07/08/2012 - 08:14 am.

    You can’t just have the elderly buying their own individual health insurance without putting in place a fairly elaborate system of rules and regulations to share the costs and ensure affordable coverage. Otherwise, what may represent a subsidy of 80% of the cost of health care for an average elderly person might only be 20% of what an old person with diabetes would be charged, and 1% of what an elderly person recovering from chemotherapy might be charged (if they could get private insurance at all, which they won’t). Market-based solutions to health care need to deal with the problems that make health care a poor market. Many health care costs are all too predictable, so it always pays for insurers to try to discourage and/or charge exorbitantly those who are sick or likely to become so. Privately purchased health care only works if you regulate that all customers must be charged the same, and all buyers must be accepted. Either that or some sort of subsidy system where insurers who take on patients with specific long term maladies receive a bonus to compensate the predictable extra expenses. This is close to the Swiss system, which while private is highly regulated. It’s not as simple as some folks makes it out.

    That being said, the transfer of wealth from young working Americans to old indigent Americans must have a limit, and it would be better if America’s elderly rather than the government decided which forms of expensive health care they would rather do without.

  12. Submitted by Harris Goldstein on 07/08/2012 - 02:31 pm.

    Paul Ryan has the solution, seriously

    Paul Ryan’s approach will solve this problem. It changes Medicare from a defined benefit to a defined contribution. Granted, the profit and overhead of private insurer’s will mean you get less for your Medicare dollar. And, instead of those nasty government bureaucrats “controlling” your healthcare, we’ll have those benevolent insurance company bureaucrats.

    It does allow us to control cost. But, in the end, it’s a coward’s solution as it simply allows the government to say “it’s not our problem, talk to your insurance company”. We’d be better with an honest discussion of what should and should not be covered.

  13. Submitted by Neal Rovick on 07/09/2012 - 08:28 am.

    If Americans were in search of better health, would’t an indicator of that be the number of doctor visits a year?

    Well, the Americans are pretty low in the number of visits per year:

    http://www.ncbi.nlm.nih.gov/pmc/articles/PMC1329455/figure/f3-17/

    Japan….. 12.8
    Germany….. 8.5
    France….. 7
    UK….. 5.5
    US….. 4

    Americans aren’t really busting down the door to get in to see the doctor about getting healthy. And given that the number is skewed by the sick who visit the doctor quite often, the number of doctor visits per year for the “average” person without health complains is really low.

    Now, for fun. divide the number of visits into the per capita spending in those countries:

    Japan cost per doctor visit…..: $ 241
    Germany cost per doctor visit…. $ 496
    France cost per doctor visit….$ 568
    UK cost per doctor visit….. $ 634
    US cost per doctor visit….. $1875

    The outlier status of the US spending is readily apparent.

    No one is minding the cash register.

    • Submitted by Pat Berg on 07/09/2012 - 11:50 am.

      Co-Pays

      I’m not sure how other folks deal with it, but for me, the co-pays are high enough that I avoid doctor’s visits unless I’m really miserable. Then add on more co-pays for every lab test, additional visit, and possible referral to a specialist (with all the lab co-pays all over again because the new doctor always seems to want to do his/her own tests) and it gets very expensive very fast.

      God forbid I have something that might require surgery!

      The current status of my bank balance ends up having a LOT to do with how important any particular doctor visit is to me in the overall scheme of things . . . . . .

  14. Submitted by jody rooney on 07/09/2012 - 10:58 pm.

    This is the best data you could use?

    Both WHO and the CIA fact book have more current data than this.

    It would have been nice for the article to use it and perhaps compare it with health outcomes.

  15. Submitted by Kevin Nash on 01/10/2013 - 11:53 pm.

    Health care issues are found critical in the United States of America, as half of populations are suffering from negative health issues therefore American government and other non profitable organizations are working for developing their health care systems to provide beneficial and advanced features to the people. The GDP statistics shows the current condition of health care systems.
    http://urgentcarenow.com/directory/tx/houston

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