Too Much? Not Enough?

 by Art Woolf

Vermont's hospitals plan to spend $1.8 billion next year

an increase of about 6.6 percent over what they are spending this year....The requests totals $1,804,105,066 a figure that is about $112 million more than the current hospital budgets.

No doubt we'll hear a lot about how this is an example of how health care spending is out of control, busting employers' budgets, etc.

Nobel Prize-winning economist Robert Fogel has a different perspective:

The main factor [driving health care costs] is that the long-term income elasticity of the demand for healthcare is 1.6—for every 1 percent increase in a family’s income, the family wants to increase its expenditures on healthcare by 1.6 percent. This is not a new trend. Between 1875 and 1995, the share of family income spent on food, clothing, and shelter declined from 87 percent to just 30 percent, despite the fact that we eat more food, own more clothes, and have better and larger homes today than we had in 1875. All of this has been made possible by the growth in the productivity of traditional commodities. In the last quarter of the 19th century, it took 1,700 hours of labor to purchase the annual food supply for a family. Today it requires just 260 hours, and it is likely that by 2040, a family’s food supply will be purchased with about 160 hours of labor.

Consequently, there is no need to suppress the demand for healthcare. Expenditures on healthcarehealth interventions increasingly effective. Just as electricity and manufacturing were the industries that stimulated the growth of the rest of the economy at the beginning of the 20th century, healthcarehealthcare will pull forward a wide array of other industries including manufacturing, education, financial services, communications, and construction.

Update:  Harvard's Greg Mankiw and MIT's Daren Acemoglu have more to say on Fogel's ideas.  Acemoglu's research shows that rising incomes don't lead to a rising share of GDP being devoted to heatlh care:

the tentative conclusion [is] that much of the rise in the health-care share of GDP may be due to policies and regulations related to private and social insurance and the way that the health market is organized (that dreaded word "incentives").

If you haven't read David Goldhill's article on incentives in health care in the latest Atlantic Monthly (How American Health Care Killed My Father), it's well worth reading.

Meanwhile, Mankiw points out that

an expansion in the range of products available to the consumer due to exogenous* technological change. As doctors figure out new and better ways to prolong and enhance life, we may rationally choose to buy these products.

Comments

[Tom]

I don't know of anyone who *wants* to increase their expenditure on health care.

[Keith Moran]

Nobel Prize or not this guy must be joking. Nobody WANTS to spend their money on health care. But, trying to be responsible members of society we spend money to protect ourselves and our families from catastrophic financial ruin in the event of major illness or accident. In order to do this we are forced to turn over an ever higher percentage of our financial assets to the Medical/Industrial complex through premiums and co-pays.
I for one really resent the fact that our political system seems totally incapable of addressing these issues in a rational way due to the massive amounts of money the Medical/Industrial complex is stuffing into the pockets of our elected officials.

[Mike Bernhardt]

Art, you may be aware that Robert Fogel is the uncle of UVM's Dan Fogel. Lots of intellect.

[Paul]

Sort of like buying a new car. No one wants to increase what they spend, but most want car with modern improvements. And the improvements cost more. Thus, we "want" to increase what we pay.

[Timothy Diette]

Amen Robert Fogel. I do want to spend more...if spending more involves a new drug or surgery that allows me to live longer or better quality life. If others want a 1970 version of a heart bypass, be my guest! If my friend who had a child enough before the due date that the baby would have died if it had happened 20 years ago...again money well spent!

There is plenty of waste in the system, but don't expect costs to plummet. I want doctors to be paid a great deal of money so the best still want to do it. I want drug companies to make enough money that there is a big incentive for others to undertake the risky business of trying to discover new meds and so on.

[Vermont Woodchuck]

I find it incredulous how people will not pay for yearly basic hospital/doctor visits, yet blithely write a monthly check for cable TV or the Spa membership that will triple that outlay.

Sell a Major Med plan for catastrophic coverage and pay everything else out of pocket. All will be VERY conscious of costs and much more wise users of the medical product.

[David Usher]

Goldhill in the Atlantic Magazine story that Art references nails the problem and the solution. The incentives in the health care system are aligned to always increase costs. Fundamental reform of the sort that Goldhill recommends is the direction we must go. The government under any scenario cannot control health care costs. They have no record to support any assertion to the contrary.

It's also time to pay attention to H.100, a bill sure to rear its head in the next Vermont legislative session. By attention, I mean resolve to defeat it.

[John Booth]

I find it interesting that economist do not reognize the fact that tax payers for years have had a portion of their taxes invested by the goverment in the science of medicine. We would not have the problem of rising cost of medical care if the tax payer moneys had not been used for medical research. I also find it interesting the economist don't point out that tax payers money will underwrite the cost of national health care and that only part of the tax dollar paid into the goverment gets back out of goverment for the program. The balance of the money, maybe 505 stays in goverment to suppot itself. Most likely non goverment solutions even with high profits are less costly than a goverment funded solution if the cost of goverment is included in the accounting.

[Peter Joes]

Kind of hard to believe my eyes. Seems like Art is saying that the massive increase in just this one area of Vermont health care is a good thing.

Somehow the same people that rail against the increases in ed spending aren't up in arms about the explosion of health care costs. Health care costs three times as much as education and is rising three times as fast. Since Douglas took office the cost of health care in Vermont has doubled.

But this doesn't seem to be a problem for many. Why?

Two main reasons I can see. The first is that most of us don't write a check for our health care. Someone else pays it, whether this be an employer or the gov't. We don't have the slightest idea what a lot of the costs are. When was the last time you went to a doctor or specialist's office and saw their rates on the wall? If they were on the wall you would see rates that in many cases exceed $1000 per hour.

The second is the fact that the wealthy benefit greatly from the current system. A person earning a million a year may spend one percent of their income for med insurance, while a $40,000 a year worker needs to pay 25% of their income for the same $10,000 policy.

Any real fix to the medical system is likely to be supported by some kind of broad based tax. Bad for rich people and those that think (erroneously) they are currently getting their health care for free.

PJ