In the Long Run We Are All Sick

This chart from the Kaiser Family Foundation, using OECD data, has been going the rounds of the blogs. You have probably seen it already:
Growth in Total Health Expenditure Per Capita
U.S. and Selected Countries, 1970-2008

Exhibit 3 Growth in Total Health Expenditure Per Capita, U.S. and Selected Countries, 1970-2008

A comment from Kevin Drum:

The United States, of course, has the highest spending, but it also has the highest growth rate.

The first part of that statement is true – it stands out a mile, or more precisely by $2,535 per person per year. This is the difference between the latest OECD numbers for annual real health spending per head in the USA and the next highest OECD country, Norway. A small, unrepresentative country with a population of 5 million scattered over 149,000 square miles of fjiords and mountains is unable to get economies of scale; as a super-rich petrostate it can afford a gold-plated universal system. And it still only spends 2/3 of the US level. This is outrageously high for the results it buys – 16% of GDP, a good 5% higher than the OECD peloton. The projections of future public health spending on Medicare and Medicaid are the only honest part of the deficit scare, but the overall cost picture is even worse as the public programmes are relatively more efficient.

So you’d expect the USA to be an outlier on the growth rate as well. Is it really? You can’t read that off from a non-logarithmic chart, and the overall inflation obscures what happened near the origin.

So I played around with the same OECD dataset to extract the growth rates by decade. Spreadsheet with source data and working here. The results will surprise you.

Kevin is wrong on growth rates. In the 2000s, US costs have been rising slower than in Canada and Britain. US health spending has never grown as fast as it did in France, Japan and Switzerland in the 1960s. The big gap in absolute levels today results from a similar recent growth rate applied to an absolutely higher starting level. The real gap opened up in the 1980s.

Three things do stand out from the chart:

* long-term growth rates have converged (the range between highest and lowest has dropped in zigs and zags from 15% to 2.3%);

* growth rates have generally declined;

* growth rates are still much higher for health spending than overall GDP – about twice -, so the share of health in output continues to rise inexorably.

The obvious explanaton of these facts is that the growth rate is primarily determined by worldwide changes in medical practice and technology, not national differences in structure, which drive the wide differences absolute levels.

* The convergence is economically explained by the globalisation of science through information technology and the Internet, the adoption of English as the scientific lingua franca, and freer movement of researchers and doctors. The hypothesis is testable: it predicts that the inter-country lags in the adoption of new medical techniques and equipment have gone down over time; an RBC-recommended research project for somebody.

* The decline is economically explained by the slowing-down in medical innovation, for instance in genuinely new prescription drugs coming to market.

* The stubbornly higher growth rate of medical costs than GDP is plausibly explained to a considerable extent by the cost-enhancing content of innovation. Some innovations, like the measles vaccine and keyhole surgery, have presumably saved money; others, like retrovirals for HIV, chemotherapy, and transplants have raised them. The latter have outweighed the former, so the net effect is up.

I’m much less sure about the force of the third hypothesis than the first two. Other forces are probably at work. Demographic ageing for one: but this is much higher in Japan then the USA, and the rate of growth in costs is lower. The use of data mining by insurance companies to discriminate against unprofitable high-risk clients is an innovation (a welfare-destroying, negative-sum one) limited to the USA, and cannot explain a wider trend. So pending More Research I can’t be fagged to do or seek out, I’ll assume the third factor is significant though not exclusive.

The fact that the US level is so much higher still has consequences. The boringly normal USA will still hit a health care spending crisis first. This just can’t grow faster than GDP indefinitely, or there will be nothing left for bread, circuses and the legions. Bending the cost curve sooner or later isn’t a policy option, it’s a logical necessity, and not only for the USA.

The USA does have one option that isn’t open to France, Britain, Japan or Canada: to copy one of their systems and bring absolute costs down to theirs. This would buy time, perhaps a decade. Clearly, the level of resistance to any such move would be enormous. It’s a safe bet that the existing patchwork, plus Obamacare, will provide US health care for a while. Obamacare, if its allowed to, includes lots of widgets to try to reduce costs, some of which will probably work. So it buys a little time, if less than single-payer would have done.

In the long run then all our economies are sick. If I’m right, the current course of medical innovation will drive us all into economic intensive care, so We Must Do Something.

The Something for the GOP, the Ryan Medicare plan, is to institute market rationing by income. The latest medicine will be limited to an ever-narrowing circle of rich families. The rest of us will buy the second-best we can afford, like the Nairobi poor today.

The socialist alternative – the GOP’s false vision of the British NHS today, and the reality of organ transplants – is administrative rationing of high-cost medical resources by need or desert.

Don’t like either option? Then we’ve got to bend the direction of medical innovation away from expensive treatments and towards inexpensive prevention and cure.

[Cross-posted at Same Facts]