The Impact of Excessively Expensive Health Care on the Economy

In his Washington Post column Robert Samuelson finally gets to where the wheel hits the road in thinking about health care:

The idea that most middle-class Americans have been treading water economically is conventional wisdom. It is already playing a role in the 2020 campaign, as the Democratic presidential candidates propose policies (Medicare-for-all, free college tuition at state schools, subsidies for child care, to mention a few) intended to relieve the financial stress on millions of middle-income families.

But the conventional wisdom is wrong — or at least misleading. Although the squeeze is not a myth, it’s highly localized: uncontrolled medical spending. This is crowding out other spending, from wages to defense budgets. If we don’t stabilize health costs (and there is little sign that we will), we should expect the squeeze to continue indefinitely. Income inequality would also probably worsen.

We now have a new study from economist Richard Burkhauser of Cornell University that illuminates health care’s peculiar role. A standard benchmark of economic well-being is median income: It is the earnings in the middle of any distribution of income figures. The higher the median, the better off people are assumed to be. In recent decades, the median income of U.S. households has grown slowly, stagnated or declined. In 2018, according to the Census Bureau, the median household income was $63,179; in 1999, it was $61,526.

But wait: The official figures don’t count health insurance, whether private or public (employer-paid insurance, Medicare and Medicaid — federal health coverage for the elderly and poor).

To remedy this omission, Burkhauser and his collaborators (economists James Elwell and Kevin Corinth) estimated median income based on varying definitions. The simplest definition included labor income: wages, salaries, farm income and self-employment. Defined this way — and adjusted for inflation — median income has dropped 21 percent from 1970 to 2016. This explains why so many Americans feel squeezed.

However, that’s not the end of the story. A broader definition of income includes all labor income, interest and dividend payments, Social Security, other government transfers and — most important — the value of private and public health insurance. Under this definition, median income rose 68 percent from 1970 to 2016. By this definition — and reflecting the impact of health insurance — typical households have enjoyed a slow increase in living standards over nearly half a century.

Which definition of income to believe? Why, both, of course.

We have the worst of both worlds. We don’t count health insurance as a form of earnings that would improve median income. People consider health spending separate and apart — something that is deliberately open-ended, because, as Sen. Bernie Sanders (I-Vt.) repeatedly reminds us, it is a “right” to be exercised when needed.

He goes on to analyze how employers shifting health care costs has adversely affected on workers and the economy in general.

Health care is consumption but it’s a different sort of consumption. When you go to the store to buy a box of corn flakes, it’s because someone in your family likes corn flakes. Health care is different. Very few people seek care because they like care—indeed, that’s considered pathological. It even has an ICD code—F68.1. But we pay for care while what we really want is health.

Most of the focus on health care reform has been on answering the question who pays? For some reason we hope that paying for their own care directly will of itself lower costs. I’m skeptical. As long as incentives are misaligned health care spending is unlikely to decrease. IMO what is needed is to recognize that health care is devouring the economy, as Mr. Samuelson notes in his column, and that reducing overall spending on health care regardless of who pays is the sine qua non of health care reform.

3 comments… add one
  • jan Link

    My take on healthcare reform is not an intellectual approach but one rooted in my own pragmatic experience. Whatever is bring retailed, when competition is a driver, costs tend to decrease. When incentives are added, a more prudent change in behavior often occurs as well. However, when bureaucratic intervention is the primary lever used to make any societal problem better, the reverse usually happens.

    For example, a few years back it was reported there was sixty billion dollars of fraud associated with the Medicare program. One can only imagine how that number would multiply if Medicare for all was put in place. In many people’s minds government paid programs are nothing more than “free” money. The fact these monies come out of nameless peoples’ pockets – taxes – is irrelevant, especially for those who don’t participate in franchise tax payments. Furthermore, there is a softer accountable “bottom line” when funding is publicly derived, rather than individually or through some private sector mechanism. That’s not to say a safety net is not needed. However, if government assistance is given indiscriminately, without perimeters regarding those qualified for said programs, it will be used indiscriminately with greater waste and fraud in it’s wake.

    I might add that school breakfast/lunch programs have become more open-ended and costly. Currently, there are more funding proposals dealing with housing the homeless, requiring vast sums of extra money to be gleaned from a combination of reshuffling city funding around, placing developer fees on commercial, residential or both, followed by placing a billion dollar bond measure on the 2020 ballot (these are ideas in the mix for Los Angeles). Never mind that monies already flagged for homeless living units have been bogged down in bureaucratic morass, with the cost per unit near extravaganza numbers!

    But, that’s the government way of getting stuff done, with no cost-effectiveness or oversight in sight.

    Medicare for all, you say…….

  • steve Link

    “For example, a few years back it was reported there was sixty billion dollars of fraud associated with the Medicare program.”

    The administrative costs involved in billing Medicare are much lower. All admin costs are in general much lower, and you spend less time on billing. So when you compare that with private insurance you need to remember several things. First, we dont really know the amount of fraud in private health care since they dont open up their databases. Second, we spend so much more on billing, credentialing and admin costs that we more than make up the difference. As a rule, when people talk about admin costs they all remember costs incurred by the insurance company, but people forget the costs involved on the provider that are incurred with billing, pre-certing, credentialing, etc.

    Of note, every other country in the world that has quality medical care also has care that is cheaper than ours. They also have more egoist involvement. In theory there are some reasons why market based care could be cheaper, but in reality no one has figured it out and attempts to do so have been limited, but resulted in costs rising.


  • steve Link

    Egoist should instead read government.

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