The Richer We Get

Healthcare spending will grow faster than the economy because that's what people want.
Dec 01, 2003

Humphrey Taylor
Healthcare costs are out of control." "The rate of growth of healthcare spending is unsustainable." We have all heard or read claims like those hundreds of times over the last 30 years-not just in the United States but also in many other countries.

Nevertheless, I believe they are dead wrong. Increased healthcare spending is sustainable because people want more and better medical care, and economic growth will allow us to pay for it, even if the rest of the economy grows at a lower rate. Furthermore, the evidence of the last decade strongly suggests that healthcare spending in the United States and in most other developed countries will grow much faster than their economies and that this growth may even accelerate.

The evidence is compelling. In most countries healthcare spending has grown much faster than gross domestic product (GDP). Between 1990 and 2000, healthcare spending per capita in the United States, in inflation-adjusted dollars, grew by an average of 3.2 percent per year-39 percent faster than GDP's average annual growth of 2.3 percent.

During that decade, healthcare spending increased faster than GDP growth in 23 out of 30 of the world's richest countries, all of which belong to the Organization for Economic Cooperation and Development (OECD). In all 30 OECD countries, during the 1990s the median increase in real (adjusted for inflation) healthcare spending was 3.1 percent, 63 percent greater than the 1.9 percent mean increase in GDP.

Of course, that trend goes back much farther than the last decade. Healthcare spending has grown faster than GDP in most countries for at least 50 years. And the richer the country, the faster the growth rate in healthcare spending.

A regression analysis finds that, statistically, the size of GDP per capita in 1990 explained more than half-56 percent-of the variation in the growth rates of healthcare spending in the OECD countries (if Luxembourg-a tiny, rich country that spends very little on healthcare and is a striking exception to this rule-is excluded from the analysis).

Statistics-like pollsters-are always better at describing what happened than at explaining why it happened, but the following common sense ideas help explain why healthcare spending tends to grow faster than GDP and why it grows faster in rich countries than it does in poor ones:

Healthcare is what economists call a "superior good." A recent Harris Interactive survey found that Americans choose healthcare as the best way to spend additional money as the economy grows, ahead of education and far ahead of defense, cars, food, clothing, shelter, entertainment, or anything else.

Medical advances allow society to provide more care to more people. That means more and better tests, new and better drugs, new and better surgical procedures. As a result many people are alive who would have died; and medicine has improved the quality of life for many people with chronic disease and serious injuries. That is expensive, and it will cost more in the future, but people in developed societies believe that's a good way to spend money.

Public expectations are rising. Even if there were no new technologies, it is probable that, as consumers became better educated and better informed, they will demand and use more medical products and services. It is clear that public expectations for the care they should receive have increased substantially-to the point, some argue, of being unreasonable. That's human nature.

The population is aging. Although the precise impact of an aging population on healthcare costs is debatable-because a healthier population presumably needs less care- there is a general consensus that it adds significantly to costs.

What are the chances that those trends will continue for the next decade, with healthcare spending increasing much faster than the economy and increasing fastest in the richest countries? As British economist Alex Caincross once wrote: "A trend, to use the language of Gertrude Stein, is a trend, is a trend. The question is: Will it bend? Will it alter its course, through some unforeseen force, and come to a premature end?"

The key phrase here is "unforeseen force." All of the known forces that explain the high rate of growth of healthcare spending in the 1990s seem likely to continue during the next decade, unless we abolish death, disease, pain, and suffering.

There will be many exciting new medical technologies, the population will get older, consumer expectations will increase, and healthcare will continue to be a superior good. As always, we will argue about who should pay for all the healthcare we want: the government (taxpayers), the employer, or the consumer. But pay for it, somehow, we will.

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