Les Jones

Why Are U.S. Healthcare Costs So High?

Monday, March 13th, 2006 | Health Care |

Charles Wheelen’s The Top 10 Reasons for Soaring Health-Care Costs attempts to explain why the U.S. in particular has high healthcare costs relative to other countries.

He minimizes the role of malpractice lawsuits, which is consistent with studies i’ve seen. His third item may be the most unappreciated explanation for why the U.S. spends so much more on healthcare as a percentage of income than most other nations: because we have the money to afford it, and when people have a choice in how to spend their money, they spend it on healthcare.

3. Health care is a “luxury good”.

Wait. Before you start sending me angry e-mails, please let me clarify. I’m not saying that health care is a luxury. I’m saying that health care is a “luxury good,” which is a technical term in economics. It refers to any good that wealthy people demand in disproportionately greater amounts than less wealthy people.

The opposite is an “inferior good”, which is something that people actually consume less of as they get richer. Ramen noodles, for example, are likely to be an inferior good. I’m certain that my graduate students eat far more of them than Donald Trump does, his capacity to afford huge quantities notwithstanding.

Richer societies, and richer people within a society, have higher expectations for health care than less wealthy people. We increasingly demand medical fixes — and have the technological capacity to provide them — for problems that our grandparents would have just tolerated. Think hip replacement, stomach stapling, Lasik eye surgery, and so on. Our spending a rising share of our GDP on health care as we grow richer as a nation is not inherently a bad thing.

2 Comments to Why Are U.S. Healthcare Costs So High?

Mike
March 13, 2006

That’s terrific.

The disconnect between those who pay the bills and those who consume the services is probably the biggest issue, but it’s just one of many.

He touches only briefly on one point in particular which deserves more attention - as people live longer, and manage to struggle on with more and more of the diseases which used to kill them outright, we should expect that consumption of medical serves will increase sharply. It’s no surprise that people who suffer from chronic illness or advanced age consume a grossly disproportionate share of services. As our medical system gets better, more and more of these folks survive even longer.

Think about it - an ever-greater demand for services is a sign of a productive, properly functioning health care system! Combine that with ‘Baumol’s disease’ and you can be pretty much assured that costs will rise indefinitely.

It’s ironic, isn’t it? More and better health care results in more sick people.

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