Monday, August 17, 2009

You Get What You Pay For

One of the few things that it seems that almost everyone can agree on in the health care debate is that as a country we spend far too much on health care both as an aggregate figure and as a percentage of GDP. But before we accept this as a given, this underlying assumption deserves to be examined more closely. Craig S. Karpel does just that in today's Wall Street Journal:

Mr. Obama has said that "the cost of health care has weighed down our economy." No one thinks the 20% of our GDP that's attributable to manufacturing is weighing down the economy, because it's intuitively clear that one person's expenditure on widgets is another person's income. But the same is true of the health-care industry. The $2.4 trillion Americans spend each year for health care doesn't go up in smoke. It's paid to other Americans.

Somehow the impression has been created that spending money on health care is somehow wasteful and that money could be better spent elsewhere. But why? Is spending money on schools, roads, housing, transportation, welfare, or consumer goods better than spending money on health care? Perhaps. But it's not automatically so and certainly that question is open for debate.

The basic material needs of human beings are food, clothing and shelter. The desire for food and clothing drove hunter-gatherer economies and, subsequently, agricultural economies, for millennia. The Industrial Revolution was driven by the desire for clothing. Thus Richard Arkwright's water frame, James Hargreaves's spinning jenny, Samuel Crompton's spinning mule, Eli Whitney's cotton gin and Elias Howe's sewing machine.

Though it hasn't been widely realized, the desire for shelter was a major driver of the U.S. economy during the second half of the 20th century and the first several years of the 21st. About one-third of the new jobs created during the latter period were directly or indirectly related to housing, as the stupendous ripple effect of the bursting housing bubble should make painfully obvious.

Once these material needs are substantially met, desire for health care--without which there can be no enjoyment of food, clothing or shelter--becomes a significant, perhaps a principal, driver of the economy.

As countries mature economically and grow richer it's natural to expect that they will spend more on health care. The question then becomes what is the "right" amount to spend? And who determines what that amount is, the market or the government (or some form of both as we currently have)?

No matter what one thinks of the state of the American health care system, it is impossible to deny that the US is a leader in innovation care and advances in medical technology and treatment. It is not a coincidence that while we spend the most on health care we also produce the most advancements and breakthroughs in health care.

We should carefully consider what the impact of attempts to limit that spending will have on our ability to continue to lead the world in medical advancements. And whether measuring the amount that we spend on health care--as an aggregate or percentage of GDP--is truly an indicator of whether the system works or not.

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