It’s been said many times but bears repeating. Expenditures are not costs. How often have you heard the claim, “health care costs in America are out of control?” I hear it a lot, and it is problematic for at least three reasons.
Reason #1: What the heck is health care? The forgoing claim treats “health care” as one big glob of stuff, each unit of which is indistinguishable from another. Doing this is akin to making the claim that “US GDP is …” as if all units of output are the same. Of course what this masks is that there are all kinds of goods and services that can correctly be called “health care” and it makes sense only to discuss the costs of each of these particular units. How has spending on MRIs changed over time, for example? Or how about spending on each doctor visit? And so on. There is simply no way to make an apples to apples comparison of health care today with health care in the past (or across countries for that matter) without talking about particularly what we mean.
Here’s an analogy – how much information would you learn by hearing, “Americans spend far more on sports than Italians do?”
Reason #2: Health Insurance is Not Health Care I often hear the health care cost claim couched in the language of high and increasing health insurance premiums. Indeed, I feel the bite of this myself. I am enrolled in a high-deductible HSA plan (a so-called “catastrophic” plan) and my annual premiums (family) for this policy exceed $12,000 per year! That is almost as much as a minimum wage worker, working a full 2,000 hours in a year, could earn in an entire year! But again, health insurance is not health care. Rather, it is a jumbled way of paying for particular aspects of the health care system (I say particular because a healthy diet and exercise regime are very much health care behaviors and almost nothing is said about these in the “costs are out of control” literature). Do rising insurance premiums reflect an underlying cost problem? Perhaps. But those premiums themselves really do not say anything about health care costs.
Reason #3: Expenditures are Not Costs The most important point is that expenditures are not the same as costs. When you hear the expression, “health care is 17% of GDP” what that means is that the dollar value of all health care goods and services purchased in the US is 17% of the total dollar value of everything purchased in the United States. Now, it is possible that this reflects an increase in costs, but it is by no means a certainty. Why? Because the dollar value captures the price (or cost) of health care services times the quantity of health care services purchased.
So why don’t expenditures equal costs? Two reasons. First, even if the cost of any particular health care service is the same today as in the past, we are consuming a far larger quantity of services today than in the past. If you take expenditures to be P x Q and and we add more Ps and Qs to the mix, then of course health care expenditures are increasing. For example, today we have medicines like Lipitor to help keep down blood pressure due to cholesterol buildup, and Americans spend millions of dollars per year on it. Does that mean that “health care costs” are higher today than in the past? We did not have Lipitor 40 years ago and therefore did not spend anything on it.
The second reason is related to the first – when we talk about “Q”, the quantity of health care services purchased, we have to assume that the quality of goods over time remains unchanged. This is what folks have in mind when they argue that American health outcomes are actually worse than in other countries. But quality is measured imperfectly when we do national income accounting. Is a heart surgery today really the same quality as a heart surgery of the past? Even if the surgery itself does not prolong life, is the recovery time lower? Is the pain less? Are the chances of infection lower? And so on.
Put starkly, the only way that someone could correctly argue that “health care costs are larger” in the United States today than in the past is to identify particular health care products and services and to compare how the actual cost of providing the same quality and quantity of that good or service has changed over time. In other words, for the claim to be true, one would have to argue that to produce a heart bypass surgery today uses more real resources than to produce an identical heart bypass surgery in 1980. You would have to demonstrate that tylenol uses more real resources to produce today than in 1980. And so on. Real economic costs are actions taken by an economic agent that consume real resources. This is entirely different than discussing how much money is exchanged in a large sector of the economy over time.
But explaining this distinction is not glamorous, it doesn’t make for a nice soundbite on Fox News or CNN, and it certainly doesn’t sound great for supporting whatever one’s preferred vision of social ordering of the world is. So we never hear it. That’s too bad. Because to use health care’s share of national income (increasing) as a crisis indicator is akin to arguing that education’s share and the environment’s share of national income increasing are also signs of a crisis. And I’ve yet to hear that point made. Indeed, one typically hears just the opposite. Funny, isn’t it?