Economics, Entitlements

Healthcare fact of the week: Why do Americans spend more on healthcare? Because they can

Americans have the highest health spending on the planet. Why? Because they can afford to do so. What few people realize is that the United States has increased its standard of living vis-à-vis its biggest competitors despite rising health expenditures (figure 1.6c).

It may seem trivial to observe that Americans spend more on healthcare because they can afford it. But it gets to the heart of an important question: Why are we so preoccupied with rising health costs in the first place? From the standpoint of the average American’s welfare—measured in terms of their standard of living—what really matters is how much they have to spend on everything else once healthcare has been purchased. We can approximate this standard of living by simply subtracting national health expenditures from the rest of GDP and then dividing by population. To make these comparisons, I have relied on Penn World Table estimates of GDP per capita, which have been carefully constructed to produce a standardized metric of living standards that allows for meaningful comparisons across countries and over time. That is, in these comparisons, a 2005 dollar has equivalent general purchasing power across each of the years and countries shown.

In the United States, real (inflation-adjusted) healthcare spending per capita has been rising faster than real GDP per capita for as long as we can measure it (back to 1929). Consequently, healthcare absorbs a growing share of GDP. But the same has been true for all our major competitors for as long as we can measure it (back to 1960). For purposes of discussion, I’m defining the nation’s major competitors as the rest of the countries in the G7 (Japan, Germany, UK, France, Italy, and Canada) since these represent our major industrialized trading partners. Countries such as China and India surely will grow in importance in the decade ahead, but right now their standard of living is far behind that of the United States.

The United States for many decades has enjoyed a far higher standard of living than in the rest of the G7. In 1960, non-health GDP per capita in Japan was 62 percent lower than in the United States. The rest of the G7 also lagged behind the United States, though by not quite as much (ranging from 43 percent lower in Italy to 19 percent lower in Canada, the country whose standard of living came closest to that of the United States). This should come as no surprise: the United States emerged as the world’s strongest industrial power after World War II, an advantage that could easily have been predicted to persist only 15 years later.

But here’s what may surprise many readers: in real dollar terms, the U.S. margin of advantage in non-health spending increased between 1960 and 2007 for every single G7 country except Japan. Moreover, even since 1980, this U.S. margin of advantage increased for every country except the UK (which saw a minuscule decline in this metric). This means that even countries which experienced a lower growth rate than the United States in real health spending per capita lost ground to the United States in their real non-health standard of living. How could that be? The absolute increase in real U.S. GDP per capita was more than enough to absorb the absolute increase in its real health spending per capita during the same period.

A concrete illustration will make this clearer. From 1980-2007, U.S. health spending per capita grew by 4.3 percent a year. In Germany, this increase was only 2.5 percent a year. One might suppose that this large difference in health spending growth rates would have allowed Germany to catch up with the United States in terms of its non-health GDP per capita. That is, if Americans were spending more on healthcare, they must be spending less on everything else. But that’s not what happened. Between 1980 and 2007, the difference between U.S. and German health spending per capita grew by more than $3,000 (i.e., Americans spent $528 apiece more than Germans in 1980, but by 2007, this difference had grown to $3,078). Had non-health GDP per capita grown by identical amounts in each country, this would have reduced the U.S. non-health standard of living by more than $3,000 vis-a-vis Germany. But the rise in U.S. GDP per capita instead was so large that it not only covered the $3,000 in added health spending, but increased the U.S. margin of advantage over Germany in non-health spending by nearly $4,000! This illustrates the enormous power of a growing economy: Americans literally were able to have their cake and eat it too.

This is a critically important truth: the United States spends more on healthcare in large part because it can afford to do so. And unless the United States suffers a sharp decline in its GDP growth compared to its competitors, this pattern can persist for many decades. Even today, the margin of advantage I have been describing remains so large that even for Canada (where the U.S. margin of advantage is smallest within the G7), the United States could afford to increase its health spending by 50 percent without entirely eradicating Americans’ higher non-health standard of living relative to Canadians.

A rich country has to spend its income in some fashion. Would critics of the U.S. health system feel better if all the extra income that found its way into the healthcare system had instead been devoted to buying pet food, lottery tickets, or fancier cars? Put another way: which would you rather be? The country that spent more on healthcare because its booming economy gave it the means to do so? Or the country whose growth in healthcare was constrained by lower economic growth? This is not to argue that we cannot and should not find ways to get rid of avoidable health spending where feasible. But it puts into perspective where the United States really sits relative to its competitors. The United States is not doing nearly as badly as some critics have alleged. Moreover, these figures raise serious questions about whether we really wish to go down the same path as other European social welfare states.

Christopher J. Conover will be hosting an event at AEI on Tuesday, February 28, “Bad Medicine: The Misconceptions Driving the Health Care Debate” (RSVP here). The charts shown in this blog post are based on his new book, American Health Economy Illustrated, to be released this month by AEI Press. See PowerPoint version of Figure 1.6c. and Excel spreadsheet containing international comparisons of GDP and health spending per capita from 1960-2008 for data, sources, and methods.

2 thoughts on “Healthcare fact of the week: Why do Americans spend more on healthcare? Because they can

  1. The issue with this kind of article is that it only is looking strictly at economy, which is a bit surprising seeing as more and more individuals have lost their jobs and the economy is in a slump. it isn’t surprising that as a nation, critics are looking at all the needless spending on health care, and the model that just because spending is possible, does not mean it is necessary sustainable or even ideal.

    High spending does not equal smart spending. We have so many insurance companies that each have different billing practices which are required to be perfectly adhered to, otherwise bills are denied. Doctors must hire billing and coders that are up to date on each different company, and send out claims that are billed at a higher rate, because usually insurance companies will either not pay or deny claims, which require rebilling and increasing medical bills. On top of this issue, ICD-10 is being released which will change all the billing codes for procedures which will require more training for each billing and coder and most likely cause new issues as claims are denied constantly. Our doctors should be worried about health and saving lives, not dealing financial billing nightmares that are costly to solve.

    Just two weeks ago, an article by the L.A. times magazine stated that UCLA’s hospital had its contract with Blue Shield suspended as the rising costs of procedures have made billing their insurance company even unsustainable. According to the article, the hospital had been billing the insurance company for part of its medic-aid and medi-cal bills.

    To top it off, high costs associated with health care are creating a barrier where only those who can afford insurance are the ones who get regular and preventative health care. As employers are now opting to stop providing insurance for their employees, forcing individuals to buy privately, or worse yet, go without insurance, many individuals are waiting to get health care until its become a serious problem. Instead of going to the doctor and being treated early on when a diagnosis or ailment may be easier and more inexpensive to fix, people are waiting until they are truly ill, and going to the emergency room instead. Being at the hospital itself, and especially in the emergency room, is a very expensive and many times, unnecessary event if they had only received regular check ups with a primary care doctor. This happens even more often, with those who have no insurance at all, as they can’t afford to have regular check ups, and emergency rooms are not allowed to turn away a sick patient.

    Now, with the money that could be “saved” on health care, would it not be more wise to invest it into better practices of preventative medicine and health in that sense? Could the lower costs of health care provide actual care for not only those who can afford it, but for those who are less fortunate without having to resort to national health care coverage? Could it not be possible that if we were not wastefully spending money in a system that is broken and just saying, “we can so we should” that perhaps we could climb the ranks a little on key factors such as infancy mortality rate, which we are currently 34th place? Behind EVERY 1st world nation almost?

  2. You are correct that “high spending does not equal smart spending.” There are plenty of opportunities to trim excess health spending. But this piece is part of a broader argument that I’ll elaborate on in tomorrow’s book talk that debunks the idea that other nations are doing better than the U.S. is in terms of restraining health spending growth. They are not and in the periods that they “beat” the U.S. in terms of having lower annual growth in inflation-adjusted health spending per capita, the explanation is that their economies were growing more slowly, NOT that they have found a magic bullet to eradicate all the wasteful spending you cite.

    Both here and abroad, “excess” expenditures largely arise from misplaced economic incentives. On average, we have too much front-end third party coverage of expenses (the equivalent of using your homeowner’s insurance to pay for mowing your lawn or auto insurance to pay for gas) and too little catastrophic coverage. Despite our having 50 million uninsured, the U.S. has the 4th lowest share of health spending covered by out-of-pocket payments in the entire world. Thus, it is not surprising that our health spending when correctly analyzed actually falls right in line with that of other countries. Problems of waste and excess are global phenomena not unique to the U.S. Increasing the amount of government control over health care is therefore a misguided solution in my view. This is not an argument against addressing waste and excess: only an argument against expecting greater centralization of health decisionmaking to be an effective approach.

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