Does Health Cost Too Much?

If you think so, stop buying so much

"When you've got your health, you've got everything," my mother used to say. All the evidence suggests that most Americans fervently agree with my mom, given how much they are willing to spend on health care. And they are projected to spend a lot more in the coming decade. According to a widely reported new study in the journal Health Affairs, Americans will be spending nearly $4 trillion per year on health care by 2015. In other words, in 10 years about 20 percent of the country's gross domestic product will be spent on health care, up from 16 percent today. In dollar terms the annual average cost of health care will rise to $12,320 per person in 2015, compared with $6,683 per person in 2005.

Does this trend represent a social crisis or an economic disaster in the making? Not necessarily, says Robert Fogel, Nobel laureate in economics and University of Chicago professor. Contrary to most people's intuitions, Fogel points out that a large supply of disease and disability does not automatically increase the demand for health care. It takes something more—namely, money. "In order for the demand for health care to be high, income has to be high," notes Fogel.

To illustrate his point, Fogel looks at trends in "expanded consumption," which account for the fact that as income has increased, American consumers have preferred to take an increasing share of their real income in the form of leisure, rather than in purchasing more commodities, as would be possible if they did not reduce their hours of work. In other words, Americans work many fewer hours than they did a century ago because the work week is much shorter and they actually get to retire before they die. Fogel finds that in 1875 the share of income spent on food, clothing and shelter averaged about 75 percent of expanded consumption, and only 1 percent went for frills like health care. To put this in more concrete terms, in 1875, it took 1,700 hours of work to purchase the annual food supply for a family. Today it takes about 260 hours of work.

And modern Americans' demand for health services hasn't grown because disease and disabilities have increased. In fact, quite the opposite has occurred. Fogel shows that in 1900, American men age 50-54 endured an average of 3 chronic medical conditions, and their confreres who were lucky enough to make it to 65 and above suffered from six chronic conditions. In 1900 only one American in 25 made it past age 60. By the mid-1990s, according to Fogel, American males in their early 50s generally suffered from one chronic condition, and those in their late 60s put up with two chronic health conditions. Nearly 9 out of ten Americans now live past 60.

By 1995, the share of expanded consumption that Americans devote to food, clothing and shelter dropped to 12 percent, while the share spent on health care grew to 9 percent. In recent years, it turns out that for every 1 percent increase in income, Americans will spend 1.6 percent more on health care. Americans can do this because the percentage of income they spend on other things like houses, refrigerators, cars, computers, food, and clothes is dropping. Once people have adequate food, clothing and shelter, what they demand more of, and spend more on, is healthy life.

If this is the case, why is there so much gnashing to teeth over increased health care spending? After all, no one decries increased spending on travel, restaurants, SUVs, computers, bigger houses, and so forth. The answer, says Fogel, is that the bulk of health care expenditures are made by third parties—the government and employer based insurance—which promise unlimited care. Fogel argues that this cannot continue, and health services in the future will have to be differentiated on the basis of what individuals can pay. He suggests that eventually a package of "essential" health services will be provided to everyone while well off patients will purchase more expensive services. But let's set equity issues aside for now.

Fogel also acknowledges that citizens of the European Union live slightly longer than Americans on average, despite the fact that we spend a lot more on health care. While noting the criticism that some money is wasted on higher administrative costs in the United States, he attributes a good bit of the difference in the level of spending to American preferences for faster treatments and access to more specialists. For example, a Briton will often wait two years for a hernia operation whereas most Americans are treated within weeks. It may well be that Europeans live with more untreated chronic, though not life-threatening conditions than do Americans. Because we have higher incomes, we demand more gold-plated medical services (private rooms with telephones and cable television) even if they don't cure us. However, if we think we're spending too much on health care, then as we grow ever wealthier, we could choose to spend the $4 trillion in 2015 on fripperies like bigger houses, nicer cars, or cooler gadgets.

Looking to the future, Fogel argues, "Just as electricity and manufacturing were industries that stimulated the growth of the rest of the economy at the beginning of the twentieth century, health care is the growth industry of the twenty-first century." Thus he optimistically concludes. "The increasing share of global income spent on health care expenditures is not a calamity; it is a sign of the remarkable social and economic progress of our age."