The Healthcare Sector Is Different

I urge you to read the interesting, graphics-rich post at Business Insider on spending, deficits, and growth. Rather than analyzing the post in detail I encourage you to read it in full. Here’s the quick summary:

Pain is entirely the wrong way to think about closing the deficit. If it’s important to make it go away, we need to find a way of doing the exact opposite, putting people to work and making the economy grow.

I think that we can all agree that putting people to work and making the economy grow are by far the best way to reduce the deficit. Here’s where I disagree:

As the economist James Galbraith explained in an interview with Business Insider, there’s an inherent contradiction to these charts in that they assume that medical costs will grow and inflate like crazy, and yet actual GDP growth will remain stable. If medical costs boom as the CBO (and others) expect, it’s likely that GDP and especially nominal GDP will be higher than people expect, meaning the ratios won’t be as dramatic as people expected.

I think that’s completely wrong and, quite to the contrary, I think that healthcare is different from other sectors of the economy. One of the more significant ways in which healthcare is different is that growth in the healthcare sector comes at the expense of growth in other sectors. Its relationship to low GDP growth in the non-healthcare economy and income inequality are causal.

Rather than doing extensive research of my own to prove this I’ll just point to a few key facts. First, employment, a reasonable first order approximation for growth in a sector, has grown monotonically over the period of the last twenty-five years. It has grown independently of the business cycle, in recessions and in recoveries. Second, total employment has been more or less flat over the last fifteen years. Noisy but flat. You can either take the position that employment is not even a first order approximation of growth or that the healthcare sector is growing at the expense of other sectors. I do the latter.

Another observation supporting my claim is that the government is responsible for between 60% and 70% of all healthcare spending. In an environment in which 25% (or more) of that spending is borrowed, that means that healthcare spending is increasing the national debt load. Debt overhang has been demonstrated to result in slower growth than would otherwise be the case.

So, no, I don’t think that a healthcare sector growing rapidly necessarily means an overall economy that’s growing. Quite to the contrary I think that for a healthy, growing economy we need a smaller healthcare sector. Just as we need a smaller financial sector and a smaller education sector.

One more way in which the healthcare sector is different from other sectors. The healthcare sector grows as care increases; economic welfare, i.e. happiness, grows as health increases. Is the national health really increasing that quickly? By what measure? As has been pointed out about healthcare, outputs per input has been decreasing for decades in the sector.

20 comments… add one
  • steve

    I have puzzled over this for years, read lots of papers,and dont have a real answer, so you may be correct. However, let me ask you a couple of questions.

    1) If healthcare is growing at the expense of other sectors, which sectors do not grow at the expense of some others?

    2) Don Boudreaux is doing a series comparing prices in 1956 with the present. In response to a question about healthcare he asked, “would you rather have 1956 care at 1956 prices or 2012 care at 2012 prices?” That may help you answer your last paragraph.


  • steve:

    1. The sectors that grow at the expense of other sectors are healthcare, education, and defense. To the extent that it is subsidized, finance. Primary production, e.g. farming, lumbering, mining, oil and gas production, etc. don’t grow at the expense of other sectors. Neither does manufacturing. Unless you start bailing out manufacturers.
    2. Why are those the only alternatives? Why not 2012 healthcare at 1970 prices (adjusted for inflation)? I think that’s perfectly reasonable. The main reason we don’t have that is that wages in healthcare have grown faster than those in other sectors.

    I’m the wrong person to ask that second question anyway. Given my family history I wouldn’t have a problem with 1956 healthcare at 1956 prices. IMO the real question is assuming you paid the full freight yourself (and so did everyone else) would you want 2012 care at 2012 prices or 1956 care at 1956 prices?

  • I have the Baylor Hospital bill for my natural delivery in 1957. $300 and change.

  • Andy

    would you rather have 1956 care at 1956 prices or 2012 care at 2012 prices?

    Depends on who is paying 😉

  • Jimbino

    You say that gummint is responsible for some 65% of healthcare spending. I have no reason to dispute that figure, though the last one I saw said 50%.

    In any case, an uninsured taxpayer who walks into an emergency room for care has already paid some 50 to 70% of the cost of his care, even if he leaves without paying a cent!

  • steve

    @Andy- And who it is. Assume it is your kid.

  • 2012 prices aren’t all so bad. Over at the Riverpark Imaging Center you can get a ct scan in the area of $280. A colonoscopy for about $200.

  • Those prices don’t help the poor any, but middle class people don’t much balk at costs like that.

    That’s less than a couple of tires. And you have to drive the car, amirite?

  • Andy

    I think we’d all be happy if we could get 2050 healthcare at 1776 prices – well maybe all of us but steve!

    Seriously, though, considering no one knows what is paid for healthcare on their behalf, it’s all kind of a moot point.

  • Not me, Sugar. I have $2500 deductible.

    Of course, it’s been 2003 since I spent any kind of money like that on my health. Surgery for for an inguinal-femoral hernia, ran about $7,000 after I shopped. Could have brought it down about $700, too, with a sonogram at a different facility.

  • Had no insurance at all at that time. But some cash.

  • Damn gardening.

  • steve

    “Why not 2012 healthcare at 1970 prices (adjusted for inflation)? ”

    We had no MRI, laparoscopic procedures, or modern monitoring then. Hard to price what did not exist. But, more broadly, assume we had no education, healthcare or defense. How much do the other sectors grow? We would be Somalia. These three sectors play a part in enabling all of the others. Are we paying too much? Yes, when compared with other countries, but it still leaves my second question I think. If your wife or kid gets a bad headache, do you want 1956 care at those prices? She would get a plain X-ray, no CT scan or MRI. At most, a pneumoencephalogram, and the accompanying pain for days to weeks after. If she really did have something going on, there would be no way to diagnose and minimal treatment. If it was just a benign headache, she would be disabled for a week or two secondary to the test.

    Look at education. If you make more than 150k-200k dollars people have to pay full costs to have their kids go to school. Are people not trying to get their kids into those expensive schools? Hardly. The competition is stiffer than it ever was. Those schools are mostly accepting kids from wealthier families.


  • We had no MRI, laparoscopic procedures, or modern monitoring then

    For some odd reason, unlike nearly every other sector of the economy, automation in healthcare does not produce cost reductions but cost increases. Strange. Stranger yet when you consider that in Japan MRIs are performed at a fraction of the cost that they are here.

    I might add that you are implicitly claiming that the reason for higher costs is higher capital budgets. I have produced ample data showing that is not the case.

  • TastyBits


    We had no MRI, laparoscopic procedures, or modern monitoring then. …

    I agree. Rarely is this considered.

    @Dave Schuler

    For some odd reason, unlike nearly every other sector of the economy, automation in healthcare does not produce cost reductions but cost increases. …

    I agree. I think the simplest answer is that “they can”, but it still makes little sense. The demand exceeds the supply, and there is little competition.

    In the early to mid 1990’s, the PC demand was outpacing the supply, but competition kept the prices steady. For the same price, you were able to get a more powerful computer.

    If healthcare followed this pattern, a doctor visit would include an x-ray, MRI, CT scan, etc. at the same price. Due to the lack of open competition, there is no price control mechanism. Instead, caps are used to control price increases, but these keep prices from decreasing.

    I think bureaucracy contributes to decreased competition. The payers (private or government) are not able to react quickly to changing market conditions. Anything new requires an approval process that is slower than the changes.


    … If your wife or kid gets a bad headache, do you want 1956 care at those prices? She would get a plain X-ray, no CT scan or MRI. …

    A 95% certainty can be increased to 99% certainty with these tests, and in most cases, these are safe and free. The choice is easy, and there are always exceptions the doctor can use to justify any controls placed upon him/her. It is natural for everybody to be as certain as possible.

    In the cases where it is not free, choices must be made. I have been there, and they are not always easy. Getting a CT scan rather than new tires has consequences. Old tires can be deadly, and they are not free. Increasing the diagnoses certainty from 95% to 99% will cause an increase in the certainty of an accident due to worn tires.

    In my case, we drive more carefully, especially in the rain.

  • We had no MRI, laparoscopic procedures, or modern monitoring then.

    Zoinks! steve, work on the reading comprehension.

    2012 healthcare (i.e. MRIs, laparoscopic procedures, modern monitoring) but at prices from the 1970s. You want us to believe that the higher health care prices => higher quality? I keep hearing that the U.S. quality of care is nothing special. Typical in fact.

  • If your wife or kid gets a bad headache, do you want 1956 care at those prices?

    Ahh the old argument from emotion.

    Its for the kids!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

  • jan

    The “It’s for the kids!” cry is used for everything these days. I’m surprised people don’t take it a step further, though, applying it to the unfunded debt that “the kids” will be saddled with, too.

    The current projected unfunded social obligations, that no one talks about — Medicare, SS, future retirement benefits of federal employees — is calculated at somewhere around 87 trillion dollars, or 550% of our GDP, or approximately 10 times the median family income per household.

    So, where are the Kid Advocates decrying those almost insurmountable numbers?

  • steve

    “For some odd reason, unlike nearly every other sector of the economy, automation in healthcare does not produce cost reductions but cost increases.”

    Recovery time from cholecystectomy in 1956, about a week in the hospital followed by 6-8 weeks at home. Now, home same day and back to work whenever you want, though most people take at least a day off. Productivity savings for the worker and the economy? Hospital costs came down also.

    With the headache pt I mentioned, we could not diagnose an aneurysm in the past. With the ability to diagnose, we could actually treat, driving up costs. in terms of total social costs, is that better?

    TB- When comparing 1956 and 2012, it was more like upgrading 50% to 99%.


  • steve

    For the kids. Good way to avoid answering the question. Besides, that is always where I see the fire breathing libertarians turn into the “spend whatever it takes” types.


Leave a Comment