Robert Fogel on the rise in health care costs

“Why is it that although the average age of onset of disabilities has been delayed by ten years [by health care advances in the U.S.], and that these disabilities have become milder than they used to be, the share of GDP spent on health is rising? One factor is the increase in the proportion of the population that is elderly. However, such changes in age structure account for a minor part of rising expenditures, on the order of 10 percent.

The main factor is that the long-term income elasticity of the demand for healthcare is 1.6—for every 1 percent increase in a family’s income, the family wants to increase its expenditures on healthcare by 1.6 percent. This is not a new trend. Between 1875 and 1995, the share of family income spent on food, clothing, and shelter declined from 87 percent to just 30 percent, despite the fact that we eat more food, own more clothes, and have better and larger homes today than we had in 1875. All of this has been made possible by the growth in the productivity of traditional commodities. In the last quarter of the 19th century, it took 1,700 hours of labor to purchase the annual food supply for a family. Today it requires just 260 hours, and it is likely that by 2040, a family’s food supply will be purchased with about 160 hours of labor.

Consequently, there is no need to suppress the demand for healthcare. Expenditures on healthcare are driven by demand, which is spurred by income and by advances in biotechnology that make health interventions increasingly effective. Just as electricity and manufacturing were the industries that stimulated the growth of the rest of the economy at the beginning of the 20th century, healthcare is the growth industry of the 21st century. It is a leading sector, which means that expenditures on healthcare will pull forward a wide array of other industries including manufacturing, education, financial services, communications, and construction.”

Robert Fogel, “Forecasting the Cost of U.S. Healthcare”, The American: The Journal of the American Enterprise Institute (3 September 2009).

http://american.com/archive/2009/september/forecasting-the-cost-of-u-s-healthcare


Robert Fogel is the Charles R. Walgreen Distinguished Service Professor of American Institutions at the University of Chicago Booth School of Business. He won the Nobel Prize in Economics in 1993.

Essentially, Professor Fogel is saying that rising health care expenditures are a reflection of rising wealth and not a cause for worry. The complaints about costs and efforts to restrain them come from employers and governments that pay the bill. Rather than limiting access and otherwise rationing health care, it would be better to shift costs away from businesses and governments toward households and consumers, especially through added charges for such things as private hospital rooms, quicker attention by physicians, and not medically necessary procedures such as elective surgery.

I would add that if the “problem” of the health care in America is simply that people want to spend their growing income on more health care it would counterproductive to try and limit the expansion of health care sector, such as the present bills in Congress seek to do. More facilities and personnel are needed, not less.