Healthcare Spending: Too Much, or Too Little!?

Michael Brant-Zawadzki, MD


September 18, 2006

While most consider our nation's rising healthcare expenditures as nonsustainable, the macroeconomic analysis is not quite that simple.

I remember the managed care tidal wave cresting over California in the early 1990s, and the associated pull-back in hospital and other healthcare expenditures that were based on presumptions of inappropriate (excessive) use of resources. It seemed the freeze on health facility construction, hiring of nurses and other hospital personnel (if not downright layoffs of hospital personnel), and predictions of doctor surpluses made sense given a new era of frugality and "managed" utilization. Was the simultaneous development of an economic recession (which hit California particularly hard) a pure coincidence?

Ever consider how many people the healthcare industry employs? It's the largest employer in my hometown, which is the third largest town in the state of California. A lot of tax revenue comes from all of those employed folks, not to mention the drug, device, and other health-related product manufacturers, pharmacies, for-profit hospital chains, etc, dollars that accrue to Uncle Sam.

While we all hear that 16% of the gross domestic product (GDP) goes to healthcare, do we ever hear what percentage of our tax revenues (ie, income) derive from the healthcare industry? I've asked that question of several notable healthcare economists and some representatives in Congress, only to get that "deer in the headlights" look and a polite "... maybe I'll look into it..."

It seems politically incorrect to talk of healthcare in any other way than as a governmental entitlement or a basic right of citizenship (and even the right of noncitizen immigrants).

So imagine my surprise when I read a recent (August 22, 2006) column in The New York Times, that paradigm of political correctness, entitled "Making Health Care the Engine That Drives the Economy." Yes, drives, not destroys.

In this hesitantly written piece, Gina Kolata (one of the Times' chief healthcare reporters) refers to some recent economic opinions, including data from a compelling paper out of Stanford University that appeared in the Quarterly Journal of Economics (April 7, 2006) suggesting that the growth in healthcare expenditures is to be not only expected, but perhaps welcome.

The authors of the paper, entitled "The Value of Life and the Rise in Health Care Spending," postulate that the growth in healthcare expenditures is a rational response to the growth in per capita income. They base this premise on a mathematical model using standard economic assumptions. As the costs of food and housing have fallen in relative terms over the past decades, people are more willing to spend on healthcare. The authors point out that people value healthcare spending because it allows them to live longer and enjoy better lives. Indeed, life expectancy has risen from 68.2 years in 1950 to 76.9 years in 2000.

A consequence of this increase in life expectancy is a commensurate increase in healthcare spending from 9.4% to 15.4% of GDP, they note.

They go on to predict that, on the basis of their model, "... the optimal health share of spending seems likely to exceed 30% by the middle of the century."

Let's hope it is money well spent. If we're all living longer, better lives, our Social Security and other pension crises may need solving sooner than our health financing crisis.

Given the coming doctor shortage (despite the predicted surpluses of the '90s), at least I will be working well beyond my expected retirement years, so when the Feds say let's look at Medicare and Social Security, I won't care.


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