Back To The Future: Healthcare Edition

Health care really isn’t my issue, but I’m going to wade into it anyway. This weekend, Matt Yglesias (probably my favorite blogger to argue with) said:

I think that too often people’s pet concerns about health care costs point to things that increase the level of health care spending rather than the high growth rate of health care spending.

Think about the market for cars. Cars are pretty expensive. They’re sold at a wide variety of price points. And quality-adjusted prices for cars don’t show any noteworthy crazy trends. Now suppose the government made cars tax deductible, what would happen? Well I assume that at the margin people would start buying more expensive cars. So for a few years, car spending as a share of GDP would accelerate. But pretty soon the American automobile fleet would have turned over and the acceleration would stop. The subsidy, in other words, provides a one-off boost to automobile spending but it doesn’t do anything to change the underlying cost structure of the system.

Health care, I think, is like that. But what’s really distressing people about health care isn’t the absolute level of spending, it’s the very rapid pace at which prices are rising.

Except that, if we look at spending on an internationally comparative basis, and look at percentage changes here and elsewhere, they aren’t rising very rapidly here. From 2002 to 2008, US per-capital health-care spending grew a bit faster than five and a half percent a year. That puts us in the middle of the pack of industrialized countries; Dutch spending grew nearly 7% per year, Canadian spending more than 5.7% per year, and UK spending more than 7%; by contrast, French spending grew less than 4.5% per year and Swiss spending grew a bit more than 5%. A similar picture obtains if you look back at the previous six-year period; American health-care spending per-capita grew a bit under 6% per year in that period, a slower rate of growth than the Dutch, British, Danes or Swedes, but faster than the French or Swiss, much faster than the Germans, and slightly faster than the Canadians.

The problem is not primarily the high growth rate of our health-care spending; the problem is precisely the high level of our health-care spending. Which in turn means that a growth rate that looks reasonable when compared internationally is unsustainable in terms of the bite it takes out of the domestic economy.

We got into this mess primarily because our per-capita health-care spending growth rate didn’t slow as quickly as our peer countries. Back in 1972, American health care was already dramatically more expensive on a per-capita basis than the British system, which operates very differently. But it was only modestly more expensive than Danish, Swedish, Canadian, German or Swiss health care. And health care expenditures were rising across the board in this period. From 1972 to 1978, American health care expenditures per-capita grew by a bit over 12% per year. But German per-capita expenses went up by 14%. British per-capita expenses went up by just under 12%. French per-capita expenses went up by over 13%. Swiss expenses went up by 11.3%. And this was the era of double-digit inflation; similar increases in prices and wages in all sorts of sectors were normal.

The problem is that America maintained a very high rate of growth in per-capita health care expenses well into the 1980s, well after inflation in general was tamed, and didn’t bring our growth rates down to internationally comparable levels until the 1990s. From 1978 to 1984, America’s per-capita health-care expenses grew nearly 12%, versus a bit over 8% for the Netherlands and a bit over 9% for Germany. In the next six-year period, America’s expenses grew over 9%, versus less than 7.5% for the Netherlands and a bit over 5% for Germany. Similar comparisons obtain with Switzerland, Canada, Belgium, the UK, France. It was in the 1980s that American health care went from being modestly more expensive than other wealthy countries with mixed public-private systems, to being wildly more expensive than other wealthy countries with mixed public-private systems.

Because we’re growing off such a high cost base, even as we have dramatically reduced the rate of growth of per-capita health-care expenditures the absolute bite we’re taking out of GDP is getting out of hand. From 1978 to 1990, German heath-care expenses as a percent of GDP did not change; they were 8.4% at the start of that period and 8.3% at the end. During the same period, American health care expenses as a percentage of GDP went from 8.4% – the same as Germany – to 12.4%, a nearly 50% increase in relative share of GDP. From 1990 to 2008, German health-care expenses have increased from 8.3% to 10.7%. Looked at one way, that’s a 2.4% increase – looked at another way, that’s a 29% increase in relative share. During that same period, American health care costs went from 12.4% of GDP to 16.4% – a 4% increase. But that’s only a 32% increase in relative share – very comparable to Germany. The high cost base means that internationally comparable growth rates in health care expenses, measured either in per-capita terms or as percent of GDP, are unsustainable for the United States.

To solve our health care problem, we have to do one of three things that no other developed country is doing.

- Either we have to grow nominal GDP much more rapidly than other developed countries while holding health-care cost inflation down to levels comparable to other developed countries.

- Or we have to slow health-care cost growth to rates much lower than those achieved by our peer countries, and keep those growth rates low for an extended period, without, in the process, sacrificing growth in nominal GDP.

- Or we have to take a one-time axe to health-care costs in some fashion so that we can, from that point, grow from a more manageable base.

I think any of these is a tall order for reformers of either the right or the left. Not because the reforms are poorly designed, but because restructuring more than 15% of the economy is hard, and when that restructuring has to be led by the government it’s even harder, because there are a lot of ways to put pressure on the government not to do it. If we could switch to the Canadian system tomorrow, and thereby achieve Canadian levels of cost control, this would not solve our problems. We would not only have to switch to the Canadian system, but then use the government’s monopsody power much more aggressively than the Canadian government has to. Static international comparisons – we spend twice as much per capita or as a percent of GDP as this or that country, without getting better health-care outcomes – are probably not as relevant for figuring out where to go as elucidating the levers that would make it possible to get from here to there. Because whatever happened in the 1980s happened. We can’t go back and make it un-happen.