Arnold Kling  

Benefits of Health Care Spending

Labor Supply and Demand... Consensus Macroeconomics?...

Does America spend too much on health care? Has health care been immune to productivity increases and contracted Baumol's cost disease? David Warsh has some answers.

"cost disease" is mostly bunk — because it relies on measures of input prices instead of output prices...great as are the resources we put into [health care], the value of what we take away is much, much more.

Warsh cites a paper by William Nordhaus. Nordhaus writes,

To a first approximation, the economic value of increases in longevity in the last hundred years is about as large as the value of measured growth in non-health goods and services.

On the other hand, Warsh cites work by Charles Jones. Warsh writes,

as much as 4 percent of US GDP today may be spent on patients in their last year of life. Yet large differences in aggregate spending bring only small gains in life expectancy, at least in the model.

However, Jones himself says that "it is not at all clear that this reflects an inefficiency in the health care system."

All of this reminds me of the cliche among marketing executives that "half the money my company spends on advertising is wasted. I just don't know which half." That is, it would be nice to know more about which expenditures are producing dramatic gains in life expectancy and which are not, but that is easier said than done.

For Discussion (from the Nordhaus paper).

[Imagine] you must choose either (a) 1948 health conditions and 1998 non-health living standards or (b) 1998 health conditions and 1948 non-health living standards. Which would you choose?

COMMENTS (11 to date)
Eric Krieg writes:

Does 1948 health standards include the health costs due to the excessive smoking and drinking of that era? If I don't smoke like a chimney and drink like a fish, do I still get penalized for the self uinflicted health problems of those who do?

When I accept 1948 health standards, does that include, say, the lax 1948 automotive safety standards? The death rate per mile driven back then was just scandalous. Cars were literally deathtraps.

Do I have to accept 1948 environmental standards? Workplace safety standards?

To what extent do 1998 economic conditions disallow 1948 health standards, or vice versa.

"Health" means so many things, and not all of it comes from a doctor. This engineer would say that very little of what constitutes "health" comes from a doctor.

David Thomson writes:

I am utterly convinced that health care must be deemed expensive by the majority of our citizens if the system is to survive! People are too flippant and carefree when the perceived price is considered low. Human beings are innately selfish and will be wasteful unless restrained.

The American people have deluded themselves that someone else, the government or their employer, will pay for their health needs. This is patently false for ultimately the bill is ours to pay in either higher taxes or a smaller paycheck. The same person who nonchalantly purchases a $20,000 automobile flips out when presented with a medical bill for far less than that. In their heart of hearts, they have a constitutional right to “free” healthcare. The logical part of their brain may realize that this attitude is ludicrous, but subconsciously this is their adamant conviction.

Eric Krieg writes:

>>it would be nice to know more about which expenditures are producing dramatic gains in life expectancy and which are not, but that is easier said than done.

Boonton writes:


You aren't going to like this but your dream of using data mining on patient records can be achieved in a libertarian world through HMO. Since they can control which doctors their patients go to, they could make electronic records a requirement of being in the network.

Matt Young writes:

1948 health, 1948 non-health with personal computers.

Bernard Yomtov writes:

I agree with Eric (again!) that it is impossible to separate non-health living standards from health conditions.

Besides the kind of examples he gives (don't forget widespread air-conditioning and food refrigeration, improved highway design, etc.) what about the general level of health knowledge? Has improved understanding of the health effects not only of smoking, but of diet and exercise contributed to longevity? I think so.

Mats writes:

Most life expectancy for the buck seems to be in lessening the need for health care rather than increasing the supply of it. Make people smoke and drink less, drive more carefully, have more limited access to handguns, eat less french-fries and more carrrots...

Life expectancy is about making Big Gov't bigger: Compare US to W.Europe!

Eric Krieg writes:

>>have more limited access to handguns

You know, those "studies" linking hanguns in the home to suicides or "accidents" are bogus. They don't make a distinction between illegal guns owned by gangbangers and legal guns owned by law abiding citizens.

I have little simpathy for the gangbanging parents whose kids get a hold of their illegal guns and "accidently" shoot someone. In those cases, the parents should go to jail, and not just for the possession of an illegal weapon. More like manslaughter.


Add guns to the list of things that have become increasingly safer as time goes on. 2003 guns are safer than 1948 guns, and the accidental shooting rate proves it. For legal guns, especially ones owned by people with conceal carry licenses, the accident rate is almost nonexistant.

Jawan writes:

Here is an interesting study......from New England Journal of Medicine

Background: A decade ago, the administrative costs of health care in the United States greatly exceeded those in Canada. We investigated whether the ascendancy of computerization, managed care, and the adoption of more businesslike approaches to health care have decreased administrative costs.

Methods: For the United States and Canada, we calculated the administrative costs of health insurers, employers' health benefit programs, hospitals, practitioners' offices, nursing homes, and home care agencies in 1999. We analyzed published data, surveys of physicians, employment data, and detailed cost reports filed by hospitals, nursing homes, and home care agencies. In calculating the administrative share of health care spending, we excluded retail pharmacy sales and a few other categories for which data on administrative costs were unavailable. We used census surveys to explore trends over time in administrative employment in health care settings. Costs are reported in U.S. dollars.

Results: In 1999, health administration costs totaled at least $294.3 billion in the United States, or $1,059 per capita, as compared with $307 per capita in Canada. After exclusions, administration accounted for 31.0 percent of health care expenditures in the United States and 16.7 percent of health care expenditures in Canada. Canada's national health insurance program had overhead of 1.3 percent; the overhead among Canada's private insurers was higher than that in the United States (13.2 percent vs. 11.7 percent). Providers' administrative costs were far lower in Canada.

Between 1969 and 1999, the share of the U.S. health care labor force accounted for by administrative workers grew from 18.2 percent to 27.3 percent. In Canada, it grew from 16.0 percent in 1971 to 19.1 percent in 1996. (Both nations' figures exclude insurance-industry personnel.)

Conclusions: The gap between U.S. and Canadian spending on health care administration has grown to $752 per capita. A large sum might be saved in the United States if administrative costs could be trimmed by implementing a Canadian-style health care system

Eric Krieg writes:

>>A large sum might be saved in the United States if administrative costs could be trimmed by implementing a Canadian-style health care system

A larger sum could be saved if we could implement the Canadian legal system. A good portion of those administrators are there to deal with legal issues.

Lawrance George Lux writes:

The introduction of Medicare in the mid-1960s altered Medicine from Health to Health Care industry. The Government proclaims even the Poor could the excellence of Health Care, as enjoyed by the richest One Percent of Americans. Economists have been trying to retreat from this position from the start, always defeated by Politicans seeking political support through defense of such a economically unviable position. The Social Security administration regularly pays more for on short hospital visit for an Individual, than they paid in total of monthly SSI payments to him; doing this sometimes five or six time per year.

Every attempt to dissuade American Seniors by high Deductibles is always defeated, unless Courts claim it is discrimination against the Poor. A Tier-system of Medicare service provision must be introduced, based upon real monthly deductions from their SSI benefits. This will affect all Health Care in the Country; forcing Doctors to admit a financial responsibility for Cost-effective health care.

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