November 22, 2017

The High Cost of Healthcare: More Evidence That It’s Not Just the Prices

An alert reader pointed out to me that, in my note yesterday on the high cost of health care, I should have included a link to some important additional evidence that it’s not just a matter of prices. The evidence in question is laid out in a long, data-packed post by the anonymous author of the blog Random Critical Analysis (RCA). If you don’t want to spend an hour working through RCA’s original post, Tyler Cohen has a brisk summary here.

RCA maintains that although U.S. healthcare spending seems way out of line with that of its OECD peers when stated relative to GDP, it is not nearly so far out of line when compared to consumption. After all, as RCA points out, health care is a “superior good” with high income elasticity. In plain Englsih, that means Americans, like people all over the world, tend to devote a higher percentage of their total consumption spending to health care as their standard of living rises.

Although there are a few countries that have higher per capita GDP than the United States, there are none that have higher per capita consumption. Part of the reason is that Americans don’t save much. Another reason is that the United States runs a trade deficit, which makes its consumption larger as a share of GDP compared to countries that export a lot, like Germany or Norway. RCA also adjusts consumption data to reflect cross-national differences in the share of goods and services that are paid for by government but consumed by individuals.

What are the implications of all this? As John Cochrane points out in a comment on his own blog, the scandal is not that we spend so much on healthcare, but that we don’t get more for our money. Our high propensity to consume health care should not curb, but rather, should spur our search for reforms that could increase the efficiency of our healthcare system.