Should we worry about rising costs?” asks Cutler, the Otto Eckstein Professor of Applied Economics at Harvard, rhetorically. “The answer is yes and no. The no part is straightforward: there is no limit to the amount of GDP we can spend on any particular good if we want to. There is nothing that says it is inherently bad to spend 17% or even 40%.”
Draw a surprised breath after reading that statement. After all, America’s national total health expenditure in 2009 hit 17.6% of GDP and, according to the US Department of Health & Human Services, is still rising. To put that into perspective, the US spends more on health care than any other country has ever spent in history and that, we are told, is a reason why it is racing toward bankruptcy.
Medicare (a health care program for retirees) and Medicaid (basic services for the poor) are the largest items of federal spending (23% combined), and their share could double by 2050, according to the Congressional Budget Office. Add the cost of “Obamacare,” stated by the president to be slightly under $1 trillion over 10 years, to calculations and figures appear that move many politicians and commentators to apoplexy.
Yet Cutler has a different view. Most health care spending is actually good, he argues. Spending has been rising, he says, because it delivers positive and measurable economic value.
This runs contrary to current wisdom. While the US pays double the average of other OECD countries, costs are rising elsewhere, outstripping economic growth and burdening budgets. Governments are contemplating difficult choices to sustain health care systems: restrict public spending on health, cut spending in other areas or raise taxes.
money well spent
But in his 2004 book,
Your Money or Your Life, Cutler addressed a neglected question of the health care debate: what is actually being purchased with additional health care spending? He explains every ledger has two sides: costs and benefits. “In the US, we are having a debate about controlling spending that is happening almost entirely in a fiscal context without any sense of what it will mean for people. If we throw people off Medicaid, what will happen to their health, will it materially suffer, how many more people will die and what are the consequences of doing that?
“The debate needs to be more nuanced. In addition to paying attention to costs, we need to look at the other side of the ledger and ask, ‘What are the benefits of what we do?’” The point is not trivial. If increasing health care costs are seen as an investment in a more productive society rather than a consumption item, then health care expenditure is money well spent.
To be frank, I think it is one of the most overblown topics around Volker Amelung
Internationally, there is growing recognition that better health is linked to greater national wealth. Back in 1993, the World Bank’s
report concluded, “good health increases the economic productivity of individuals and the economic growth rate of countries.” Investing in Health
Studies have since confirmed that health is a determinant of economic development and poverty reduction in low- and middle-income countries. While the potential contribution of health to the economy of developed countries has received less attention, increasing evidence shows a strong relationship between health and national prosperity. In a 2007 report,
, independent think tank the Milken Institute compared the treatment expenditure for seven chronic diseases to total economic output lost as a result of the presence of those diseases. According to their analysis, productivity losses greatly exceed the cost of treatment. An Unhealthy America: The Economic Burden of Chronic Disease
The report noted chronically ill workers take sick days, reducing the supply of labor – and, in the process, the GDP. When they do show up for work to avoid losing wages, they perform far below par. Output loss due to lower productivity is immense – several times greater than losses associated with absenteeism. Lastly, avoidable illness diverts the productive capacity of caregivers, adding to the reduction in labor supply. The Milken Institute estimated the indirect impacts as over $1 trillion in 2003, a significant hit on GDP and a drag on long-term growth. The report concludes that “while it is well understood among policy-makers that economic growth is dependent on investments in human capital, the importance of good health in maintaining a competitive work force is frequently ignored.”
the importance of health care
In Europe, where population aging will challenge labor productivity and supply, there has been increasing interest in the interaction between health and prosperity.
(European Commission, 2005) concluded that “evidence provides a powerful argument for European governments to invest in the health of their populations, not only because better health is a desirable objective in its own right, but also because it is an important determinant of economic growth and competitiveness.” The Contribution of Health to the Economy in the European Union
“To be frank, I think it is one of the most overblown topics around,” says Volker Amelung, professor for health systems research at Hannover Medical School, when asked about rising costs in Germany (currently 10.5% of GDP in total, or annually $3,737 per person). “People have been predicting the collapse of health care for decades. Certainly, rising costs need to be discussed, but there are far more pressing health care issues,” he explains.
Amelung, president of the German Managed Care Association, said one development in Germany in recent years was that employers, faced with an aging labor force, were realizing the importance of health care. “They still don’t feel comfortable as to how they should position themselves, but they know that issues like burnout affect them. Employers are realizing that the smart strategy is not to wait until the health system is involved, but to work on prevention because it is in their interest if they want to keep people productive longer.”
Amelung believes that future discussions in continental Europe will circle around the smart provision of health care. “I believe it will focus on what is ‘good health care.’ This is not so much whether we are paying 10% or 11%, but how good the outcome is. In many senses, we may find more care is definitely not better. Take oncology, for example, where sometimes massive amounts are spent to extend life by three months with a poor quality-of-life return.”
This point about returns touches upon Cutler’s initial response to spiraling health care costs. When he hedged his answer, the “yes” addressed the return from the expenditure on health care. “If you are spending 16% on something, then you expect to get a comparable value in return,” he says.
Health care costs place a huge financial burden on federal and state or local governments that is hard to finance when the economy sours. A budget item so large quantitatively needs a more realistic source of financing, he argues.
“My personal guess is that between a third and a half of that 16% spent in the US (5-7% of GDP) is wasted. That is a shame because it could be put to much more productive uses, and that is the reason to be concerned about health care costs.”