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Feeling Poorer? Healthcare Bears Some Blame

Thursday, August 11, 2011

A look at what happens when health spending rises much faster than either national income or household wealth.

The Federal Reserve reported in June that the net worth of American households in the first quarter of 2011 was $58 trillion. This figure is almost 10 percent below its 2007 average of more than $64 trillion and even below the level at the end of 2005 ($58.9 trillion). The current anemic level of household wealth can to some degree be blamed on rapidly rising health expenditures.

The chart below shows that since 1950 real (i.e., inflation-adjusted) national health expenditures (NHE) per capita in the United States (yellow line in graph) rose much faster than per capita net worth (green line) or Gross Domestic Product (red line). Net worth is the excess of assets over liabilities. The nation’s net worth includes the net worth held by households and non-profit organizations, which represent the total wealth of the nation because assets held at the household level reflect the net worth of corporations and unincorporated businesses.

Conover Graph 15.1a

Over 57 years starting in 1950—that is, excluding the most recent economic downturn—household net worth increased at an annual rate of 7.5 percent, compared to an annual increase of 7.0 percent in GDP. However, after adjusting for inflation and population growth these growth rates decline to 2.6 percent annually for household net worth and 2.1 percent for GDP. These growth rates imply that on a per person basis, real wealth doubles every 27 years while real GDP doubles every 33 years. Real per capita health spending grew 4.5 percent annually over the same period, which was 72 percent faster than the growth rate of net household wealth. This rapid pace implies a doubling of real per person spending (in general purchasing power terms, not medical dollars) every 16 years.

The rapid pace of growth in real per capita health spending implies a doubling of real per person spending in general purchasing power terms every 16 years.

Another way to see the difference in growth rates for household wealth and health spending is to calculate the ratio of health spending for every $100 of net worth. When the Korean War began in 1950, this ratio was $1.24 in spending on health per $100 of household wealth. By 2007, the ratio had increased to $3.44 per $100 (figure 15.1b). The steep decline in net worth that began in 2007 with the onset of the recession, coupled with ever-rising health costs, caused this ratio to reach $4.70 per $100 by 2010.

Health spending does not put us in danger of eradicating national wealth, but it could be viewed as steadily chipping away at it, decade after decade. Health spending has not yet resulted in a reversal of real gains in per capita national income (GDP), and our standard of living continues to rise in inflation-adjusted terms, albeit more slowly than many might like. Likewise, increasing medical costs have not entirely prevented real national wealth from increasing.

Conover Graph 15.1b

However, less rapid increases in health spending might have allowed for more rapid gains in household wealth. Imagine, for example, if Americans had been able to annually add to their net wealth the difference between what we actually spent on healthcare per $100 of wealth and what we spent per $100 in 1950. Just this additional amount of wealth, accumulated through 2010, would have increased total household net wealth to nearly $80 trillion by 2010—nearly $25 trillion more than the actual total for that year. But that’s a very conservative estimate of the savings since it assumes that the incremental amounts saved earn zero percent interest. If we instead assume that these incremental savings would have grown annually at the identical rate as aggregate wealth, net wealth by 2010 would have reached $105 trillion—almost $50 trillion more than actual net worth last year. This hypothetical $50 trillion increase in household net worth would have been more than three times larger than the current $14 trillion national debt over which there has been so much recent political hand-wringing.

What would these cost savings outlined above have implied for health spending today? In 2010, we spent $8,385 per capita on healthcare in the United States. In the hypothetical scenario in which the incremental gains to wealth earn zero percent interest, per capita spending would have been just under $3,200 by 2010. However, under the more realistic scenario in which the incremental gains to wealth increased at the same rate as wealth in general, aggregate wealth would have been correspondingly higher. Consequently, $1.24 per $100 of wealth would have resulted in per capita health spending of just under $4,200. This amount would have been just over half of the amount actually spent last year ($8,327).

The ratio of health spending had reached $4.70 per $100 of net worth by 2010.

Few serious analysts would argue that we currently waste 50 cents on the dollar for health spending, so the point of this exercise is not to argue that we could have or should have kept health spending at $1.24 per $100 in wealth for six decades. Instead, it is to highlight the enormous magnitude of the trade-offs involved when health spending rises so much faster than either national income (GDP) or household wealth (net worth).

We face the same trade-off going forward: just as tens of trillions of dollars in potential wealth was hypothetically absorbed by a rapidly growing health sector in the past, so too are even greater amounts of potential wealth arguably at risk should the health sector continue to grow faster than GDP. Moreover, because the U.S. government bankrolls more than half of health spending, this has direct implications on the federal government’s need to borrow now and in the future.

As Silas Marner learned in George Eliot’s 1861 novel, wealth isn’t everything. But at a time when we are intensely debating what to do about a $14 trillion national debt that is rapidly rising, being able to save tens of trillions of taxpayer dollars by returning health spending to previous levels is nothing to sneeze at.

Christopher J. Conover is a research scholar at Duke University’s Center for Health Policy and Inequalities Research and an adjunct scholar at the American Enterprise Institute. The charts shown are from his new book American Health Economy Illustrated, to be released in January 2012 by AEI Press. See PowerPoint version of Figure 15.1a and Excel spreadsheets on total health expenditures and GDP and household net worth for data, sources, and methods. See Powerpoint version of Figure 15.1b and companion Excel spreadsheets on health spending per $100 of net worth under alternative growth scenarios  for data, sources, and methods.

FURTHER READING: Conover has written "Government Share of Healthcare Is Far Bigger Than Advertised" and "Health Is the Health of the State."  Related are Joseph Antos's "Medicare Reform and Fiscal Reality" and "Living in a Fiscal Fantasy World."

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