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What's the Big Deal with Healthcare Spending?

9/04/2012 06:16:00 PM
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I'm always a little disappointed by the shallowness of the coverage of the healthcare debate in the media. Every media outlet takes it as a given that the measure of the success of healthcare proposals is whether it "controls costs," by which they mean that it decreases spending on healthcare.

It is true that over the last half century, healthcare has represented an increasing percentage of our overall consumption expenditures. The conventional wisdom interprets this as healthcare representing an increasing "burden" on households. This interpretation puzzles me. We like it when GDP grows, but in order to have GDP growing, some component of GDP must grow. Since not all industries are expanding, that means that the sectors that do grow will represent an increasing share of GDP. We never worry that, for example, the share of consumption devoted to services other than healthcare has also grown just as dramatically as the share devoted to healthcare over the past fifty years:
I included the linear trend equations because without actually doing the math, its impossible to see from the data that healthcare spending is actually growing slightly faster than spending on services other than healthcare. And that is exactly my point: there is almost no difference between the two. It makes little difference, then, to complain about healthcare spending overall, as I see it. It primarily reflects the fact that we are wealthier and choose to spend that wealth on making ourselves healthier. There is nothing wrong with that. This is not something that needs to be stopped.

Indeed, everyone is so worked up about job creation lately, so lets take a look:
The blue line is an index of employment in healthcare, while the red line is an index of total employment. Since they are indexes, ignore the levels--the point I'm making is that the rate of new job creation in the healthcare sector has massively outpaced the rate of job creation in the rest of the economy. Moreover, jobs in healthcare tend not to go away during recessions, unlike jobs in the rest of the economy:
Notice the massive fluctuations in total employment growth, while employment in healthcare almost never falls, even in recessions. So far, all the data says that we ought to like the fact that the healthcare sector is growing, not fear it.

Of course, there is the issue of costs. While a robust and growing healthcare sector is nice, we also want to make sure that  the increase in healthcare spending reflects increases in services provided, not just price hikes. It is true that healthcare prices have risen more rapidly than have other prices:
To me, that looks like a relatively small problem. But then, it is really just a matter of opinion as to whether this increase in the relative price of healthcare is a big problem. At any rate, none of the proposals to "reform" healthcare--including both Obamacare and Ryancare--really address the issue. The obvious solution to graphs like these is to institute measures to expand the supply of healthcare, which will reduce the price as we slide down the demand curve. But all of the proposals to reform healthcare--democrat and republican alike--rely on supressing demand rather than expanding supply, which will lower price by decreasing access to healthcare. They are all based on the erroneous premise that healthcare's rising share of GDP is a bad thing.

But wouldn't it be far better to lower prices by increasing access to healthcare? And Sarah Kliff has an excellent idea that will do exactly that.