Code Red: Two Economists Examine the U.S. Healthcare System

July 30, 2012

Putting All Our Eggs in One Basket

Filed under: Uncategorized — David Dranove and Craig Garthwaite (from Oct 11, 2013) @ 1:50 pm

At dinner last week, I mentioned that health spending seems poised to reach 20 percent of GDP and could go even higher. A prominent physician at the table seemed unperturbed. He wondered what was so wrong about spending more money on medical care. After all, medical spending gives us longer, healthier lives and what is more worthwhile than that? Never mind the important question of whether we are spending our money wisely, he did have a point. Watching medical spending go from 7 percent of GDP to today’s levels, I used to feel the same way. But for the first time my instincts tell me that enough is enough.

In the past, GDP growth was always large enough to more than accommodate health spending growth. So even as we bought more health care services, we had enough money left over to purchase more housing, more food, more transportation, more of everything. But budget mathematics has changed all of this. When healthcare represented a relatively small percentage of total spending, even a 10 percent increase would not swallow up the rest of the budget. But now our economy is barely growing, medical spending is a big chunk of total spending, and the numbers lead to some sobering conclusions. With medical spending accounting for nearly 20 percent of GDP, a 10 percent increase chews up 2 percent of the total GDP. And if GDP is growing by only 2 percent annually, all of the growth is in healthcare. There is nothing left over for the rest of the economy.

And we all feel this in various ways. Even in these noninflationary times, employers continue to shell out more every year in labor expenses. But all of the increase is going for health benefits. As employers ask workers to shoulder more of their medical expenses, many workers are seeing real reductions in their wages. The federal government faces a similar crisis. In my lifetime, Medicare and Medicaid have gone from 0 percent of the Federal Budget to about 12 percent in 1988 to 24 percent today and will soon reach 30 percent or more. Aside from defense, increases in Medicare and Medicaid spending will account for nearly all of the growth in federal spending for the foreseeable future. (I exclude social security, which is wealth transfer rather than a targeted spending program.) All other programs must take a back seat. States face a similar dilemma with Medicaid, but also face apparently nonnegotiable pension payments. The pool of money available for everything else is drying up faster than a Nebraska corn field.

All of this creates a double whammy for American workers, whose ever increasing tax bills go largely to pay for medical spending. This leaves even less money for everything else.

This might be easier to digest if we were witnessing historic technological changes that promised major breakthroughs in prevention or treatment of major diseases. But we are not; medical care continues on its path of incremental improvement. So it makes no sense to suddenly put all of our eggs in one basket, spending every last discretionary dollar on medical care to the exclusion of everything else.

I enjoy the prospect of a long healthy life as much as the next guy, but I would like to have something to live for. Unfortunately, the medical-industrial complex has a stranglehold on our imaginations. It will take something a lot bigger than the so-called fiscal cliff looming in January before our legislators are willing to implement real reforms to Medicare and Medicaid, and before we as individuals are willing to accept something other than our current gold-plated medical benefits.


  1. I have worked in the healthcare industry for over 29 years, and like you am concerned about the amount of money our country spends on healthcare. However, I’m mainly concerned because we don’t seem to get the return on investment that other countries do. The answer to reducing our GDP problem sn’t as simple as cutting federal healthcare program budgets. Our increased spending as more to do with patient expectations and medical practice than anything else. Over 30% of spending is attributable to preventable complications; inefficiencies abound, and; pricing is based more on rudimentary budgeting than cost accounting methodologies.

    Patients don’t have the option to question whether or not procedures are worth the expense because the majority of time they don’t know the price until after the fact. Was that $80,000 sinus surgery worth it, and if it was could it have been done less expensively? We’ve educated patients to ask for generic drugs versus brands, but we still don’t have a level of cost transparency that aids the care conversation. If we truly want patients engaged in both their care and the cost of that care, then we have to give them the tools to understand their choices and how to make decisions that affect both health and quality of life. Shifting more costs downstream to employees is definitely one motivator to getting people interested, but if patients and providers both don’t own the cost conversation it won’t have the desired impact of reducing costs. We’ll only begin to see people become less compliant, self-manage more and end up in the emergency room when their conditions become acute.

    Once again, we learn that healthcare is local and personal. I agree with Howard Dean, MD, that cost containment should begin in the doctor’s office.

    Comment by Sarah Wilcox — August 8, 2012 @ 11:42 am

    • Thanks for your thoughtful comment. In my next blog I will discuss various strategies for addressing overutilization and inappropriate utilization of services.

      Comment by dranove — August 8, 2012 @ 11:56 am

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