Health Is Wealth

Those who say U.S. medical spending is too high have it all backward as the benefits this buys far exceed the outlay

By Christopher Farrell

Saint John's University is a bucolic campus attached to a Benedictine monastery in Collegeville, Minn. Recently, I took the two-hour drive up from the Twin Cities to teach several economics classes at the liberal arts college. I also gave a breakfast talk before the leadership council of the local Chamber of Commerce. During the question-and-answer sessions following each event, one topic dominated: health care. The small-business owners were especially unhappy about high -- and rising -- medical costs.

It's an experience I've had in other public forums. It's striking how a uniform sense of despair underlies all the questions, from "how did we get here" to "what can be done"? Clearly, the patchwork quilt of public and private programs to pay the health-care bill is badly torn. For instance, since President George W. Bush has been in office, the number of Americans going without health care has grown by about 5 million. Of the 45 million uninsured, nearly half are full-time workers.


  Premiums for employer-covered health insurance have risen by more than 11% this year, only slightly less than last year's 13.9% premium hike. Employers are cutting back on coverage, and some are dropping the benefit altogether. The high cost of health care has discouraged employers from adding to their payrolls during the economic recovery.

And when workers lose their jobs, they also lose their coverage. Yet most people still seem to believe that meaningful reform isn't possible following the collapse of President Bill Clinton's bold attempt to overhaul the way Americans pay for medical care.

Still, the rampant discontent encouraged Presidential contender John Kerry to make health-care reform a centerpiece of his domestic platform. Many experts agree that his ambitious plan would sharply reduce the number of uninsured, bringing coverage to 25 million to 28 million people who don't have it now.


  Bush has responded with his own proposal that would lower the ranks of the uninsured by 8 million at best. The big knock on the Kerry plan is that it would cost too much, at least 10 times more than the $90 billion estimate the President claims for his health plan -- although that ballpark figure is probably too low (see BW Online, 09/22/04, "Kerry's Health Plan May Need Surgery").

Indeed, most researchers approach the problem from the point of view that Americans are spending too much on health care. That's the wrong starting point for any discussion about health-care spending and reform. America, the wealthiest country in the world, can afford to spend far greater sums on health than we do now. The payoff for the economy and individual quality of life would be enormous.

The U.S. is a rich country that continues growing at a remarkably rapid pace for a developed nation, despite some recent stumbles. What do wealthy consumers increasingly buy with their money? Medical care. That's the conclusion of a research paper by economists Robert E. Hall of Stanford University and Charles I. Jones of the University of California, Berkeley.

In the paper The Value of Life and the Rise in Health Spending, the scholars abstract from the current institutions of health care -- group plans, Medicare, Medicaid, and the like -- to ask basic questions from a social-welfare standpoint, such as "how much should we spend on health care?"


  Hall and Jones note that health-care spending has been rising as a share of the economy for a considerable period. The figure was 5.2% in 1950, 9.4% in 1975, and 15.4% in 2000. The payoff? Life expectancy is up from 68.2 years for people born in 1950 to 76.9 years for those born in 2000. They argue that the rise in health-care spending doesn't simply reflect more expensive treatments and technological advances but is largely driven by an increase in household incomes and the high value consumers put on health.

After all, consumers can decide where to spend their money, and they clearly value the medical advances that allow people to live longer -- and better -- lives. The richer America becomes, the more resources citizens will devote to health. By Jones and Hall's reckoning, health will absorb about 33% of the economy by the middle of the century.

Tell most people that a third of our economy could be devoted to health, and most will suffer visions of economic Armageddon. Surely that means less money for cars, homes, entertainment, and other goods and services. Not so, says David Cutler, an economist at Harvard University. He strongly believes that those researchers who preach "we can't afford to spend more on medicine" have it completely backward.

Cutler's reasoning: Living longer, better lives allows workers to be productive -- and enjoy themselves more throughout their lengthened lifespan. The economic and quality-of-life benefits from increased spending on health care will more than pay for themselves, he argues.


  In a recent speech, he noted that advances in combating both cardiovascular diseases and low birth weight has added over three years to life expectancy at birth since 1950. Tapping into a rich economic literature that attempts to put a monetary value on a life -- typically based on how much people are willing to pay to avoid risky situations -- he arrives at an estimate that the worth of those three additional years equals the increase the average person can expect to pay on medical care compared to 1950 -- adjusted for inflation.

"In other words, the benefits of medical advance for these two conditions alone are equal to the entire increase in medical costs in the past half-century," says Cutler.

It's wrong to criticize the Kerry plan for its cost. This is a case where parsimony is no virtue. To some extent, you get what you pay for. More important, the hand-wringing over cost misses the point: Spending more on health is a good thing, cutting back isn't. The debate over medicine and health should be over what's the best way to bring about universal coverage, to bring the benefits of improved medical care to everyone, and to focus on the value of care. America can afford it.

Farrell is contributing economics editor for BusinessWeek. You can also hear him on Minnesota Public Radio's nationally syndicated finance program, Sound Money, as well as on public radio's business program Marketplace. Follow his Sound Money column, only on BusinessWeek Online

Edited by Patricia O'Connell

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