Med Decides If We’ll Get Richer

Since US med spending is now 18% of income, and is rising faster than other spending, then whether we get richer or poorer over the next half century or so mainly depends on whether we get much added value from increased med spending.  If, as I and many others have suggested, we gain relatively little from more med spending, we may actually get poorer.

Chernew, Hirth and Cutler in Health Affairs:

At approximately long-run average rates of excess health spending growth, 119 percent of the real increase in per capita income would be devoted to health spending over the 2007–2083 projection period. We argue that an alternative scenario, under which health spending grew just one percentage point faster than real per capita income, is “affordable,” although 53.6 percent of real income growth over the period would go to health care. … This analysis thus supports the argument that reforms that would dramatically slow the rate of health care spending growth are necessary.

Robert Samuelson in the Post:

Per capita GDP … from 2007 to 2030, it’s projected to rise from $43,900 to $60,600. That’s a 38 percent increase … Unless controlled, rising health spending would absorb much of that gain. The increase in per capita GDP from 2007 to 2030 is $16,700. If health spending continued to grow at past rates, it would go from $7,100 per person in 2007 to $15,300 in 2030. This rise of $8,200 is half the overall gain ($16,700) in per capita income. …

One study … [said] continuation of present [med spending] trends would result in “falling wages at the bottom of the earnings spectrum and very slow wage growth on up the earnings distribution. These dismal wage outcomes would persist over at least the next couple of decades.”  To be sure … some care extends life and improves quality of life. But the connections between being healthy and more health spending are loose. … Most people … get few benefits from high spending.

Of course this increased med spending, and reduced other wealth, would be an overall good deal if increased med spending dramatically improved our health.  But the median med policy wonk, who says we must hold down med cost growth, clearly has doubts about the value of added med spending.  Regardless of where your opinion sits here, let us agree: the net health value of added med spending is one of the most important research questions around; it largely determines if we will get richer or poorer over the next half century.

Yet I’d guess the number of full time equivalent researchers working on this is less than a few dozen, perhaps less than a dozen.   Why so few working on such an obviously central question?

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  • http://williambswift.blogspot.com/ billswift

    Is there really any better reason to believe these projections than there was for the “standing-room-only” demographic projections of the 60s? That’s what they remind me of.

  • http://graehl.posterous.com Jonathan Graehl

    xkcd on extrapolating.

    • http://lesswrong.com/ CannibalSmith

      +1

  • http://princeton.edu/~sinsoc PeterW

    Meanwhile life expectancy continues to rise on a linear trend: http://econlog.econlib.org/archives/2009/10/unbelievably_go.html

    Getting to a higher steady-state life expectancy can be attributed to better sanitation and so on, but as time goes on it becomes increasingly likely that healthcare is behind continued life expectancy growth.

  • http://hanson.gmu.edu Robin Hanson

    Bill and Jonathan, is it all projections of the future you guys dismiss? If not, how do you distinguish the one’s you will take seriously from the others?

    Peter, have any evidence for that?

    • http://williambswift.blogspot.com/ billswift

      Projections that don’t take into account obvious feedback effects, such as rising prices, can be dismissed without much effort.

      • http://hanson.gmu.edu Robin Hanson

        Projections based on previous data that took into account a feedback already implicitly take that feedback into account.

      • http://williambswift.blogspot.com/ billswift

        Feedback isn’t a one time thing that happens and then stops. What I was getting at is that many processes, especially growth processes, have changing feedback as they progress. Sharper growth, or growth that approaches some sort of limit (even a temporary or psychological limit), is going to change, quite possibly substantially, so you need to take any projections with a grain of salt, especially of systems that are likely to run into such complications.

  • Bill

    Robin,

    You hit it right on the head.

    What we may have is just a wealth transfer to the medical-industrial complex.

    During the 80’s and 90’s I worked as an antitrust lawyer consolidating HMOs and hospitals. At one point, it looked like, with tighter networks, we were seeing healthcare costs get under control. Unfortunately, consumers preferred open access networks to closed networks, eliminating any bargaining that HMOs had with docs and hospitals.

    We seem to make the mistake that if we have a good quality network, that the wise strategy is to limit choice, enabling the plan to negotiate with providers and hospitals to get into the network.

    My experience is that with tighter networks, driven by evidence based medicine, that will be the only way we can reduce costs and improve outcomes. What we have now is just ridiculous.

  • Bill

    Oops, should read: We seem to make the mistake that an open network is a good quality network, whereas the wise strategy is to limit choice, enabling the plan to negotiate with providers and hospitals to get into the network.

  • George

    Another important research question is what proportion of our income are we willing to spend on medicine? And is that related to the effectiveness of medicine? If medicine spending is about “showing you care”, as Robin has previously argued, there is likely to be a limit to the amount we’re willing to spend similar to the limit on how much we spend on christmas or wedding presents. If that is true, it will stop us getting poorer.

    Also, I have my doubts that medical innovation will continue to increase. Medical research is very (and increasingly) regulated and politicised, which is not a great formula for innnovation.

    This is very pessimistic, I know, but I think most people would prefer there to be no option but death, than the existence of a treatment priced beyond their budget.

    • http://hanson.gmu.edu Robin Hanson

      Sure there will be a limit, but how high? There is also that limit of not being able to sustainably pay more than 100% of income for med, but let’s hope we find some other limit before then.

  • Psychohistorian

    “Yet I’d guess the number of full time equivalent researchers working on this is less than a few dozen. Why so few working on such an obviously central question?”

    Because whatever they found would likely be very uncertain, and, more importantly, no one would give a damn. The various lobbyists and congressmen writing legislation are not motivated by marginal benefits to society; they’re motivated by marginal benefits to their net revenue or their reelection campaign.

  • Doug S.

    Europe doesn’t seem to have this problem. I wonder why? 😉

    • Dan

      Costs is also increasing, but yes there it seems to be legitemate, better care, technology, outcomes etc. not so inflationary.
      Also socialism!! We all know it doesn’t work except for keeping those costs down for some reason 🙂

  • http://www.abs-usa.com Floccina

    it largely determines if we will get richer or poorer
    But how much utility and consumer surplus people get from inovations like the internet and the mp3 players etc. is very hard to quantify and IMO is much greater than what is measured in GDP. I would say people will continue to live better and better.

  • Bob Montgomery

    You are ignoring intangible benefits from healthcare spending.

    I have kids. Maybe it doesn’t really improve my kids’ health to take them to the doctor as often as I do, but it gives me (and, especially, my wife) peace of mind. Maybe that’s worth the money?

    • http://hanson.gmu.edu Robin Hanson

      Why does spending that doesn’t improve your kids health give you peace of mind?

      • Bob Montgomery

        Mostly it gives my wife peace of mind. I guess my point is that for people who don’t know that health care spending doesn’t improve outcomes, health care spending is still perhaps worth the money because of the intangible benefits. So if you force them not to pay for health care you are taking something from them.

        And in general, the assertion that health care spending doesn’t improve health outcomes is certainly believable – I believe it – but even so I have a hard time applying that to my specific situation.

        For example, my 5-yr old son had a stomache virus last weekend – throwing up, lack of appetite, stomache pain. We did usual home care for a few days; when he looked awful and wasn’t getting better after three days we took him to the doctor and they rehydrated him with an IV. Was that overkill; probably not worth the money? I kind of suspect so. Take a nation’s worth of 5-yr-olds with a stomache virus and does it make a difference one way or another to give them fluids via IV after 3 days? Probably not. But what if this case was different? I don’t know. So we paid our money and took him in.

        It’s easy to say that we over-consume health care but when it’s your own health, or your kids’ health, it’s even easier to err on the side of caution. And of course, there’s always the fact that, just as no one ever got fired for buying IBM, no one feels guilty when something bad happens and they followed “standard practice.”

        Seems to me that if most people agreed that healthcare spending wasn’t worth the money, then they would spend less. But as long as all that healthcare spending has some value, even if mostly intangible, then people will keep spending it.

  • ERIC

    Is it reasonable to suggest that a greater portion of future income spending on health care is simply an indication of what society wants to spend it’s money on? That is, does a greater portion of income spent on our health indicate the relative importance of “health” in our collective lives? Are we able to assume that in say 50 years all that will matter is health and – extending that thinking – living longer? Could this be used to argue that we will eventually have all or most our “basic” needs met and will divert more resources to what, perhaps, has always been ultimately important – immortality?

    As you can tell, I have more questions than answers.

  • ERIC

    I should add that I understand the point made about the effects of health spending and actual health benefits. For the sake of argument, I would like to assume, (and have all of you assume) that “health spending” does not preclude or exclude positive investment returns on technology advances. That is, lets assume that “more” in this case is better and that “some” dollars will be well spent and increase overall welfare (somehow).

    I think it’s important to realize that we can’t predict the exact future, which is why I find “general” thought experiments more useful (and fun).

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  • http://owningit.wordpress.com Sean Landis

    Last weekend’s episode of This American Life has a decidedly Hansonian view on health care and spending (One segment, for instance, is titled “Dartmouth Atlas Shrugged”).

    I’d be interested in reading your take on the episode.

    • http://hanson.gmu.edu Robin Hanson

      It was excellent. 🙂