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Economics of Health Care

Charles R. Morris, reviewed by Art Myatt
December, 1999

The December, 1999 issue of The Atlantic Monthly (pp. 86-96) has an article by Charles R. Morris entitled "The Health-Care Economy is Nothing to Fear." While The Atlantic Monthly makes most of its content available online, this article is an exception. To read it, you will have to buy the magazine or read it in a library.

This article provides a good deal of substance to think about. It is all too common for policy wonks to assume the future cost of health care is a problem with no solution - other than having less, of lower quality, at a higher price for most of us. This is not an acceptable solution. The wealthiest society on earth ought to be able to provide all its citizens with the health care we need to live, both now and in the future. Mr. Morris does not show us how. He does point out that many of the generally accepted reasons to believe it impossible are just false reasoning and failure to understand the issue.

Of course, knowing what constitutes a "health-care economy" would be helpful. Now, health care accounts for something around 15% of spending. It is obviously an important share of the economy, but not necessarily the single most important element. If, within the next 25 years or so, spending on health care reaches 25% of the nation's total spending, we will then have a "health-care economy." Conventional economists imagine this state of affairs to be a disaster.

While he is not a commonplace economist, Mr. Morris does go along with the commonplace political perspective that health coverage will in the future have more or less the same mix of employer-supplied health insurance, actual privately-paid insurance, Medicare, and out-of-pocket payments that is the case today. He is not a radical with a political plan to promote. He does, however, have some very interesting insights on what has been happening with health care costs, and on what is reasonable to expect in the future.

In terms of conventional economics, he says, "The primary accusation against modern medicine is not that it doesn't work but that it's an unproductive drain on the economy." It is supposed that money not spent on medical care would otherwise be invested in something or other that would make the U. S. economy more "competitive." In fact, he says, this view ignores the "world-beating competitiveness of America's pharmaceutical and medical-equipment sectors." It also ignores the fact that putting the money into purchases of most consumer electronics, imported oil, or casino gambling does absolutely nothing to make America competitive.

A political perspective on the pharmaceutical industry might focus on the fact that it relies on international patent protection to keep its prices and profits high, and that this policy prices its drugs out of reach of a substantial percentage of the world's population. But Mr. Morris is only looking at the economic perspective, and for economics, this sort of policy question does not count.<

We can let Mr. Morris speak to what does count:

Gouging coal out of mountains to run power plants so that we can waft cool air over the brows of investment bankers is totted up as 'industrial production" - an unambiguous increase in national wealth, like jet-skis and video games. But new hips that allow people to walk, intra-ocular implants that restore their vision, stents that put them back to work, are classified as non-productive "services" that somehow make us poorer. (p. 94)

He quotes another economist, Sherry Glied of Columbia University, in support of their common conclusion "that this conventional view is mostly nonsense." They both think the argument that more spending on health care will "squeeze out" spending on productive elements of the economy is simply wrong. People are themselves productive elements of the economy, and healthy people produce better than sick people, or dead. A little more sophisticated is the idea that increased spending on health care is not incompatible with economic growth:

Glied points out that the share of national income devoted to food and health care combined hasn't changed for fifty years. But we spend a lot less than we used to on food and a lot more on health care - just as we spend a lot less on clothing and a lot more on housing. (p. 92)

An economic projection made by government researchers in 1992 (referred to on p. 92 of the Atlantic article) showed that health care spending could go to 27% of Gross Domestic Product by 2020, and to 32% by 2030, while the non-health care sectors of the economy could continue to grow throughout this whole time. This particular study assumed a lower rate of growth than was actually seen through the 90's.

In fact, the economy has grown spectacularly, and productivity has increased, during recent decades when health care spending as a percentage of total spending has also increased substantially. The damage that conventional economics predicts is just not visible in the historical record.

Only part of the article is devoted to challenging the standard characterization of health care as an unproductive sector of the economy. Another section outlines an explanation for increasing spending on health care which is not simply dictated by the needs of an aging population.

Mr. Morris says:

Although the data are very sketchy, most health care costs have quite possibly been going down for a long time. It is health-care spending that is rising, which is quite a different thing. As the personal computer industry demonstrates, falling costs and improved performance usually induce more spending, not less. In the same way, by any reasonable standard of measurement - prices, outcomes, side effects, recovery time - the cost-effectiveness of cartilage surgery, cardiac bypasses, angioplasty, hip and knee replacements, non-invasive diagnostics, whole new generations of pharmaceuticals, and even mental-health interventions has improved dramatically. Cataract surgery used to be a dangerous operation, requiring as long as a week in the hospital for only marginal improvements in vision. Now it's a virtually painless hour-long outpatient procedure that usually restores near-normal sight; not surprisingly, the pool of potential customers is vastly larger. (p. 87)

Dr. Michael Lesch, an experienced cardiologist, characterized (on p. 88) the qualitative changes in his field, "When I started practice, I basically documented how my patients died. What we do today is on a different planet." So it is not just that, as a society, we are paying more for medical care than we were forty years ago, or twenty. We are getting more for it, in greater life expectancy and better health during the extra years. Economists count spending because it is easy to track spending; measuring quality is much harder, requiring a knowledge not of accounting but of the technical details of medical practice.

Costs can legitimately be compared only for the same practice. In 1950, the cost of a heart transplant was incalculable. The procedure had never been done. And then there are issues of quality. The cost of leukemia treatment that could cure only 20% of the patients (typical for 1950) should not be compared to today's treatments, which cure 80%, without some account being taken of greater effectiveness. It is not easy to do, yet the measure of costs and quality is necessary to get to any reasonable understanding of spending.

Jack Triplett, an Economist at the Brookings Institution, who has edited a collection of the most recent research [on costs], says, "Too many people simply equate the increase in spending with runaway costs - that was an important motivator for the Clinton health-care program. If that were an accurate view, you could fix the problem just by rolling back prices, and nobody would get hurt except doctors and drug companies. This recent research suggests that that is too simple a view." (p. 89)

That would explain why HMOs were only temporarily successful at holding down spending, and why they control spending only by lowering the quality of care. If the diagnosis of the problem is wrong, then the wrong cure is prescribed, and the problem remains.

In fact, according to Mr. Morris, we can expect more in the way of lower costs and greater effectiveness in the future of medicine. He describes how detailed process management at St. Luke's, in Houston, has trimmed surgical costs far below the average teaching hospital, and improved outcomes in the process. The methods and practices can be expected to spread to other institutions. Evidence-based medical practice (a sufficiently complex subject as to require a whole article or even book ), by questioning every reasonable-sounding but unproven habitual treatment, may also lower costs. Computerized management of medical information, while requiring investment initially, should in the long run bring lower costs and more effective treatment.

Having a larger proportion of all spending directed to health care is not a bad thing for working people:

Health care was once a low-wage, dead-end field, with doctors roosting comfortably at the top of a job pyramid filled out with underpaid nurses, orderlies, and aides. In 1950 health-care workers earned about two-thirds of the average wage. By the mid-1990s, however, with rising capital investment per worker, health-care wages had risen to about 109 percent of the economy-wide average. ... Health-care spending, moreover, unlike spending for cars, television sets, clothing, and oil, tends to stay home. The alarm over rising health-care spending suggests that the money is somehow dribbling away into outer space rather than being recycled into the pockets of a growing new class of professional workers. (p. 95)

While Mr. Morris expects to see "a more sharply tiered medical system" (p. 96), he does share some values with those of us who believe that a non-profit single-payer system would be the best way for America:

At the end of the day the problem with health-care spending is not that it is inefficient but that it's redistributive. Each year the small fraction of people who are very sick account for the lion's share of health-care spending. They are different people, of course, from year to year, and the odds are that all of us, once or twice in our lives, will take our turns as mega-medical consumers. Since none but the very wealthiest families can sustain the cost of big-ticket medical episodes, the risk has to be partly socialized, either privately through insurance or publicly through the tax system. I may not want to help pay for your heart attack, but I'll need you to kick in, one way or another, for the cost of my cancer. (p. 94)

This article is worth reading and discussing. Opponents of universal health care frequently say something like, "It's not at all feasible - you just can't do that without wrecking the economy!" It is good to be able to reply, "That is the opinion of some economists, but has been refuted by others." Then you can cite Mr. Morris and Ms. Glied, or you can just argue the facts and the ideas.