Below is a chart showing the correlation between medical and healthcare spending and life expectancy among more than 30 large countries. We see a rather high correlation between spending and life expectancy except for the notable outlier, USA. Based on average life expectancy at birth, the United Nations in 2015 ranked the U.S. 43rd at an average of 78.9, below countries such as Slovenia, Portugal, Greece, Chile and Costa Rica. Despite easily spending the most on healthcare spending per person, it has not achieved the higher life expectancies of much lower-spending countries.
For treatment of course, to pay salaries for health and medical workers, for hospitals and treatment centers. And it goes to make drugs, machines and tools, and salespeople to sell them all. And since nearly 90% of healthcare spending is run through insurance, in the form of private insurance, Medicare or Medicaid, an army of insurance agents and administrators is required. As the level of healthcare and private and government health insurance has grown, local economies are now often revolving around healthcare spending. Past industry has been replaced by the healthcare industry. Is spending on healthcare, as it is sometimes framed, a “growth engine” for national economic growth and local economies? Is the majority of healthcare spending going to keep the population engaged in productive pursuits, whether that’s in industry, in learning or the rearing of children?
According to an analysis by the Agency for Healthcare Research and Quality, in a given year, roughly of half of medical/healthcare spending goes to just 5% of the population. In addition, those 5% of high-medical-spenders are less healthy than the population as a whole. Specifically, those with high medical costs were 11 times as likely to be in poor or fair physical health and seven times more likely to have poor mental health than the lower spending population. In contrast to the belief that most medical spending goes to treatment and release, the majority of healthcare spending in the U.S. goes to treat chronic conditions such as asthma, hypertension, heart disease, diabetes and mood disorders. For example, a quarter of the U.S. adult population is treated for hypertension in a given year and 20% for high cholesterol.
According to the National Health Expenditures report from 2014, out of about $3.0 trillion in yearly spending in healthcare industry, about $618 billion of spending came through Medicare, about $500 billion through Medicaid, and nearly $1.0 trillion from private insurance. Just $330 billion, or about 11% of total spending, came from out-of-pocket spending. This large disconnect between the payer and the service that allows for such rapid price inflation in healthcare each year. It is not the only cause but a significant one. Imagine the effect on auto price inflation if when shopping for a car, you were only paying 11 cents on the dollar for the car and the rest would be provided by a car insurance exchange. Very simply, you would be encouraged to buy much auto than you otherwise would and you would be mostly indiscriminate with regards to price.
Ironically, even the waste and price inflation within the medical industry is seen as positive economic activity, since it is a part of spending, and thus Gross Domestic Product. But when healthcare spending (or any other for that matter) is imbedded within the total Gross Domestic Product, it is implicit that such spending is in the proper place and outside of it, the same spending would not or should not exist. But the $3 trillion in medical spending each year is what is seen, in the form of medical centers, doctors, nurses, therapists, administrators, and the rest.
What about that which is not seen?
Every dollar that is spent on healthcare is a dollar that does not go somewhere else. That does not go into desperately needed production and innovation outside the medical field. That does not go into new technology, energy or infrastructure such as roads or bridges. That does not go into green spaces, biking or walking trails or recreation areas that might naturally improve the health of the population in a much less costly way. To believe that medical spending is good simply because it produces economic growth is to ignore what is not seen.
Frederic Bastiat explained this idea more than 160 years ago as the broken window fallacy. Breaking a window, or a bone, does not add to economic growth in the aggregate, but only on a very localized level. The person who fixes the window or fixes the bone will prosper from the accident, but the economy as a whole will suffer. Money that was spent on simply restoring a condition back to health was money that was not spent on production and consumption like a new car, new technology, or saved for future new investment. Money was spent only to restore health to its original state, but that money is now not available to improve the state of one’s condition. It should be common sense that destroying wealth or health does not add to an economy as a whole, but in fact steals from productive endeavors. If I avoid breaking a bone today and avoid going to the hospital, I have theoretically reduced economic growth: there would have been more economic growth if I had been injured and gone to the hospital. But I would obviously prefer to not have this outcome. Not only would I rather have the choice as to where my money would be spent, I would not lose the time, health and productivity from my injury. The same is true with any chronic condition except it is then continued for weeks, months or years.
My best friend growing up had juvenile diabetes. He and his parents spent time, money and resources managing his condition and doubtless some people benefited by his condition. More syringes and insulin were made and he had more doctor visits. However, it is ridiculous to think the world was improved by my friend having diabetes. He would have preferred to have spent his time and money on more enjoyable pursuits and remained in good health without going to extraordinary means to do so. His money would have gone toward other avenues, with fewer syringes made, but probably more books, clothes, games or movie tickets sold, with related changes in employment in the respective industries.
Diabetes (or stroke or heart disease or cancer) is not a benefit – for individuals or an economy.
According to the American Diabetes Association, the cost of diabetes was nearly $250 billion in the U.S. in 2012. About $70 billion of that cost was from lost productivity and about $175 billion direct medical costs. Now, as far as Gross Domestic Product is concerned, that $175 billion in direct medical expenses is a direct boost to economic growth. But in fact, all of it that spending (as well as the spending on other chronic conditions) should be reported as a cost, not a benefit as it is currently. If there were no diabetes and no spending on diabetes, it would be a very strong positive for people, society and the economy. That $300 billion would be spent elsewhere, those not afflicted by diabetes would have an increased ability to work and spend more on other necessary and recreational activities. What about those currently employed because of diabetes? Those researchers, doctors, therapists, drug makers would not be employed because of diabetes, but they would then be able to use their time and ability in other avenues. True economic growth is economic spending that is positive for all, not positive for some and negative for others.
The reality is that all that spending on diabetes care and research is not eliminating the downside of diabetes. According to the American Diabetes Association, diabetes is costing $300 billion, it is the 7th leading cause of death in the U.S., an underlying or contributing cause of more than 200,000 deaths a year in the U.S. , more than 500 people a day. Compared to the general population, diabetes also results in much higher rates of heart attack, stroke, eye problems and blindness, amputations, and kidney failure, among others. Surely, such serious injuries and medical problems, while technically adding to the Gross Domestic Product of the U.S. because of the necessary expenses involved, cannot possibly be thought of as a net positive, for those affected individuals or society as a whole.
Yet there those expenses are, adding not only to Gross Domestic Product (“economic growth”), but also in the growth rates of the economy. Since the component of medical spending is a component of Gross Domestic Product and since that part of the economy has been growing much faster than the economy as a whole, than Gross Domestic Product, has been boosted for decades by medical spending, which includes spending on hospitalization after illness and injury, prescription drugs, and medical diseases.
If all these medical conditions were miraculously and instantaneously healed, medical spending and Gross Domestic Spending would collapse. But such a collapse in chronic health conditions would not be a huge loss for the economy and society, but in fact, such a “health boom”, while temporarily reducing the government’s definition of “economic activity”, would result in immense benefit for the population, economically and otherwise.