How Much Should the U.S. Spend on Health Care?


Kevin Drum notes that the United States leads the world in terms of health spending as a percentage of gross domestic product. To some extent, that's explained by the fact that the U.S. is relatively richer than other countries, and richer countries are likely to spend a greater share of GDP on health care. But according to McKinsey's data, the U.S. spends even more of its GDP on health care than you would expect given health spending ratios in other countries.

Does this mean there's a lot of fat in the system? Quite possibly. I'm certainly willing to believe it. There's some evidence to suggest that nearly a third of Medicare spending is wasteful. Robin Hanson, an economist at George Mason University, has suggested that half of all care may not be beneficial. But the key thing to remember about this debate, I think, is that the core problem isn't how much the country spends as a percentage of GDP. If individuals choose to spend more or less of their income on health care, that's not necessarily something to worry about. Instead, from a policymaking perspective, what we ought to be worrying about is how much the government spends on health care—and how much it's committed to spend into the future.

Now, those two things aren't entirely unrelated. But while the current fad in health policy is for expanding coverage while attempting to hold spending in check through better bureaucratic management, there's some evidence that a large percentage of the rapid rise in health spending since 1970 may actually be a product of government-driven programs designed to increase coverage.

In 2007, MIT's Amy Finkelstein found that the introduction of Medicare—and the subsequent increase in health insurance coverage—correlated with a 23 percent rise in hospital spending between 1965 and 1970. As Medicare matured, its influence on spending seems to have grown larger. Finkelstein estimated that Medicare ended up being responsible for about 40 percent in the massive rise of health spending between 1950 and 1990. The actual health benefits, though, were unclear: In a follow-up Wall Street Journal op-ed, Finkelstein noted that although Medicare did help prevent income shocks to the elderly, it "did not have any effect at reducing elderly mortality in its first 10 years of existence." 

The health benefits of other government-run health coverage programs are similarly dubious—as even some of the administrators in charge of the programs will admit. For example, as Cato's Michael Cannon noted a while back, in 2008, one of Indiana's health policy officials wrote a letter to the journal Health Affairs noting that despite holding what he describes as an "almost religious conviction that the State Children's Health Insurance Program (SCHIP) is effective public policy," he admits to having "no empirical evidence to support the assertion that SCHIP is a beneficial and effective way to invest in children's health." That leap of faith—that more coverage is nearly always better—describes a lot of how U.S. health policy ends up being conducted: In 2009, President Obama signed an SCHIP expansion into law.

So the mere fact that the U.S. spends a larger share of its GDP on health care is not necessarily cause for concern—at least not in the abstract. Instead, what's worrying is that the U.S. continues to pursue policies that seem to substantially increase total spending with little evidence that those policies have a significant positive effect on health outcomes.