Arnold Kling  

Robert Fogel on Health Care Costs

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His article would be self-recommending, except that Tyler uses that expression to mean something that he has not yet read. I have read Fogel's piece. He writes about rising health care expenditures,


The main factor is that the long-term income elasticity of the demand for healthcare is 1.6--for every 1 percent increase in a family's income, the family wants to increase its expenditures on healthcare by 1.6 percent. This is not a new trend.

The article is much richer and much deeper than that. In fact, my guess is that the Congressional Budget Office will want to put a couple of economists to work on some of the issues Fogel raises.

I just want to raise a Stein's Law point. Once health care gets to 70 percent of GDP, then it is going to get rather difficult to increase spending on health care by 1.6 percent for every 1 percent increase in GDP.


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COMMENTS (5 to date)
David Beckworth writes:

Arnold:

Along these same lines did you see this article by James V. DeLong titled "Maybe We Should Spend More on Healthcare"?

Here is the link: http://american.com/archive/2009/maybe-we-should-spend-more-on-healthcare

I would enjoy reading your take on it.

Arthur_500 writes:

I fail to understand the source of that idea that an increase in family income correlates to an increase in willing healthcare expenditures. I would like to investigate that number.

Those with free healthcare spend an inordinate amount of healthcare dollars (that they are not responsible for paying). Many people inthe $50,000 to $150,000 income bracket do not have health insurance because of the cost. These people limit their use of healtchare to control those costs. I do not have any data on those above $150,000 income and their use of healthcare.

On the point of diminishing returns there is no argument. We can't continue to increase healthcare expenditures in excess of capacity. Of course those figures make great graphs for Presidential speeches...

Arnold Kling writes:

Regarding James DeLong's article, there is too much evidence for Hansonian medicine to make me feel complacent about high levels of health care spending. Of course, if people were spending their own money, I would not care what they did with it.

Steve Verdon writes:

The link is borked.

Patrick R. Sullivan writes:
On the point of diminishing returns there is no argument.

Fogel is arguing that healthcare is a 'superior good', which means diminishing returns don't apply. The
Scrivener explains
:

A superior good is one that produces closer to constant rather than diminishing returns -- so as expenditures on "diminishing return goods" produce less benefit for you, you shift your additional expenditures to the superior good.

Spending that extends your life in good health always produces a valuable benefit for you, so you shift steadily more of your income to it as you finally buy all the cars you can drive, flat-screen TVs you can watch, and food you can choke down.

It follows that since consumers' incomes generally rise with overall economic growth as the years pass, total spending on health care rises faster than income -- because that's what people want.


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