Economics, Entitlements

Are American Healthcare Costs Growing Unusually Fast? No.

The Obama administration has pegged its healthcare reforms on the prospect of reducing the rate of healthcare cost growth, which the administration has termed “the real deficit” threat. The administration argues for increased federal control over private sector healthcare and the inclusion of a “public option” for the government to provide healthcare to Americans directly.

But are American healthcare costs growing unusually fast? And would greater government control be effective at controlling cost growth?

A look at health data from the Organization for Economic Cooperation and Development (OECD) provides some interesting context. Using OECD data, I calculated the rate of “excess cost growth” for 23 countries over the period 1990-2006. Excess cost growth is the rate at which per capita health costs grow “in excess” economy-wide expansion. When excess cost growth is positive, healthcare costs increase relative to Gross Domestic Product (GDP).

As it happens, the United States rate of excess healthcare cost growth from 1990-2006 is right about average among developed countries. U.S. health costs grew an average of 1.66 percent faster than the economy from 1990-2006, while the OECD average was 1.62 percent. Clearly, the U.S. has not had unusually fast health care cost growth over the last decade and a half.

Moreover, countries with far more government control over healthcare have had just as much difficulty controlling costs as the U.S. The UK, for instance, in which doctors and hospitals are directly controlled by the government, saw costs rise 2.08 percent faster than GDP.

It’s important to remember that excess healthcare cost growth isn’t the same as pure inflation, in which we pay more for the same good or service. Rather, rising costs in all countries are driven by two main factors: new medical technologies and rising incomes. New technologies, which people would have bought in the past but couldn’t since they didn’t exist, are effective but often expensive. Likewise, individuals tend to spend more on healthcare as their incomes rise, because the value of extended life tends to be greater than the value of acquiring more and more goods. (As I see it, I’d rather have another year of life to enjoy the big screen TV I have, rather than have a second big screen TV but less time to watch it.) Neither factor is a bad reason for spending more on healthcare, and by most measures of health Americans are better off today than in 1990 (obesity being an important exception).

The real problem in the U.S. is not that health costs are rising, but that they’re so high in the first place. Our current high level of spending—nearly one-sixth of GDP—isn’t due to technology and incomes so much as incentives to overspend that are built into our current system. The tax exclusion for employer-sponsored healthcare encourages over-insurance, which is both expensive in its own right and encourages individuals to overspend, since most of their costs are paid through premiums rather than out of pocket. Thus, much of our overspending on health is the result of too much government interference in markets, not too little. Fixing these problems by ending the tax exclusion and shifting to an insurance model in which a greater share of costs are born out of pocket could significantly cut costs without hurting health outcomes, according to Obama economic advisor Jason Furman. Unfortunately, the Obama health plan itself has very little to say about these kinds of negative incentives.

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