The Other Side of Rising Health Care Costs

In the public sphere, we tend to hear that the increase in health care spending as a share of GDP is a bad thing which is unsustainable and represents the evil machinations of the Medical-Industrial complex. I may sound like that sometimes myself, but it isn't exactly accurate. There is a lot of waste and misallocation of resources in the medical industry, and yes, we need to do what we can to fix that.

But us health policy wonks know there's more to it. To some extent -- maybe not the actually existing extent, but some extent -- we would expect the share of GDP spent on health care to increase secularly, and that's actually a good thing. This by Hall and Jones is one analysis along those lines, but lots of people make similar arguments.

There are really two mechanisms at work here. The first is that over time, medical technology has gotten better. We can cure many cancers that we couldn't before, or at least give people years of decent quality life. The age-adjusted death rate from heart disease has plummeted. Orthopedic surgery can very effectively fix osteoarthritis, which is one of the worst things about growing older. (It did for me!) But all this costs more. Unlike electronic gadgets, the price doesn't keep going down. We need highly trained experts, million-dollar machines, and  drug and device prices that repay expensive research (since that's the model we've chosen). Yes, new technologies can occasionally be cost-saving (though much less often than you might think) and the price can come down over time (as when drugs go off-patent), but in the real world, technological advance produces a net increase in costs.

So yes, it costs more, but it's often worth it.

The second mechanism is that as people grow more affluent, once they've met their basic needs for food, clothing and shelter and whatever else they really, really want, health care is high on the list for disposing of income. We get the elective surgery; we go to the doctor and get checked out, and yes, they'll always find something. And yes, most of us pay only a small share of  our health care expenses out of pocket, but consumer and public demand that insurers cover expensive treatments is irresistible. When they try not doing it, there is an outcry. (Although weirdly, many of the same people who do the outcrying have no problem with some people having no health insurance at all.) So Medicare and private insurance will pay the $200,000 to keep someone with terminal cancer alive for three months.

But even that is not necessarily wrong, up to a point. When we have little time left, each day is more precious. And median survival conceals the exceptions who live a long time. And that also means hope --if you can hang on a bit longer, they might come up with a new treatment. This actually happens. For example, not-so-great HIV drugs kept some people alive  long enough to get better ones.

So, in principle, we could be happy to see medical expenditures increase as a percentage of the economy. That's a choice we can make and feel wise about. That's happening everywhere, including Canada and the UK with their single payer and socialized systems, respectively. But those parallel lines are much lower. They are spending more over time, and reaping benefits, but they are also spending a lot less than we are. Both can be true.