Why Do Americans Spend More on Health Care? Because They Can. Healthcare Fact of the Week

  • Title:

    American Health Economy Illustrated
  • Hardcover Dimensions:

    7" x 10"
  • 332 Hardcover pages
  • Buy the Book

Americans have the highest health spending on the planet. Why? Because they can afford to do so. What few people realize is that the U.S. has increased its standard of living vis-à-vis its biggest competitors despite rising health expenditures (figure 1.6c).

It may seem trivial to observe that Americans spend more on health care because they can afford it. But it gets to the heart of an important question. Why are we so preoccupied with rising health costs in the first place? From the standpoint of the average American’s welfare—measured in terms of their standard of living–what really matters is how much they have to spend on everything else once health care has been purchased. We can approximate this standard of living by simply subtracting national health expenditures from the rest of GDP and then dividing by population. To make these comparisons, I have relied on Penn World Table estimates of GDP per capita, which have been carefully constructed to produce a standardized metric of living standards that allows for meaningful comparisons across countries and over time. That is, in these comparisons, a 2005 dollar has equivalent general purchasing power across each of the years and countries shown.

In the U.S., real (inflation-adjusted) health care spending per capita has been rising faster than real GDP per capita for as long as we can measure it (back to 1929). Consequently, health care absorbs a growing share of GDP. But the same has been true for all our major competitors for as long as we can measure it (back to 1960). For purposes of discussion, I’m defining the nation’s major competitors as the rest of the countries in the G7 (Japan, Germany, UK, France, Italy and Canada) since these represent our major industrialized trading partners. Countries such as China and India surely will grow in importance in the decade ahead, but right now their standard of living is far behind that of the U.S.

The U.S. for many decades has enjoyed a far higher standard of living than in the rest of the G7. In 1960, non-health GDP per capita in Japan was 62 percent lower than in the U.S. The rest of the G7 also lagged behind the U.S., though by not quite as much (ranging from 43% lower in Italy to 19% lower in Canada, the country whose standard of living came closest to that of the U.S.). This should come as no surprise: the U.S. emerged as the world’s strongest industrial power after World War II, an advantage that could easily have been predicted to persist only 15 years later.

But here’s what may surprise many readers: in real dollar terms, the U.S. margin of advantage in non-health spending increased between 1960 and 2007 for every single G7 country except Japan. Moreover, even since 1980, this U.S. margin of advantage increased for every country except for the UK (which saw a minuscule decline in this metric). This means that even countries which experienced a lower growth rate than the U.S. in real health spending per capita lost ground to the U.S. in their real non-health standard of living. How could that be? The absolute increase in real U.S. GDP per capita was more than enough to absorb the absolute increase in its real health spending per capita during the same period.

A concrete illustration will make this clearer. From 1980-2007, U.S. health spending per capita grew by 4.3% a year. In Germany, this increase was only 2.5% a year. One might suppose that this large difference in health spending growth rates would have allowed Germany to catch up with the U.S. in terms of its non-health GDP per capita. That is, if Americans were spending more on health care, they must be spending less on everything else. But that’s not what happened. Between 1980 and 2007, the difference between U.S. and German health spending per capita grew by more than $3,000 (i.e., Americans spent $528 apiece more than Germans in 1980, but by 2007, this difference had grown to $3,078). Had non-health GDP per capita grown by identical amounts in each country, this would have reduced the U.S. non-health standard of living by more than $3,000 visi-a-vis Germany. But the rise in U.S. GDP per capita instead was so large that it not only covered the $3,000 in added health spending, but increased the U.S. margin of advantage over Germany in non-health spending by nearly $4,000! This illustrates the enormous power of a growing economy: Americans literally were able to have their cake and eat it too.

This is a critically important truth: the U.S. spends more on health care in large part because it can afford to do so. And unless the U.S. suffers a sharp decline in its GDP growth compared to its competitors, this pattern can persist for many decades.  Even today, the margin of advantage I have been describing remains so large that even for Canada (where the U.S. margin of advantage is smallest within the G7), the U.S. could afford to increase its health spending by 50 percent without entirely eradicating Americans’ higher non-health standard of living relative to Canadians.

A rich country has to spend its income in some fashion. Would critics of the U.S. health system feel better if all the extra income that found its way into the health care system had instead been devoted to buying pet food, lottery tickets or fancier cars? Put another way: which would you rather be? The country that spent more on health care because its booming economy gave it the means to do so? Or the country whose growth in health care was constrained by lower economic growth?  This is not to argue that we cannot and should not find ways to get rid of avoidable health spending where feasible. But it puts into perspective where the U.S. really sits relative to its competitors. The U.S. is not doing nearly as badly as some critics have alleged. Moreover, these figures raise serious questions about whether we really wish to go down the same path as other European social welfare states.

Christopher J. Conover will be hosting an event at AEI on Tuesday, February 28th, “Bad Medicine: The Misconceptions Driving the Health Care Debate” (RSVP here). The charts shown in this blog post are based on his new book American Health Economy Illustrated, to be released in February 2012 by AEI Press. See PowerPoint version of Figure 1.6c. and Excel spreadsheet containing international comparisons of GDP and health spending per capita from 1960-2008 for data, sources and methods.

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