Let’s look at the 2013 health spending per capita bar graph I presented on my home page in greater detail. There is a lot of important economic information in this graph. I see data like this all the time on the Internet and I often wonder “what does it really mean to me?”. Take a couple of minutes and digest what the graph says to you. Generally speaking, the graph gives us three important pieces of information:
- We spend DOUBLE what 10 OECD countries spend for health care (close to $9000 per person versus about $4500 per person)
- Our health spending consumes a greater percentage of our GDP than it does in 10 OECD countries (16.4% versus 10.1%)
- Our excess health care spending (shown in red) is the result of inefficient health care delivery (e.g., due to a lack of government leadership, too many layers of overhead, over-treatment, mistreatment, and treatment with little value) and needs to be eliminated.
To many of us, economic terms like health spending per capita and GDP are only vaguely familiar. If we had to explain why they are important to us, we probably couldn’t. The existence of our excess health spending (in red) is one of the main reasons for this blog. Only by identifying and eliminating this excess within the healthcare system will true health care reform proceed. Many future blog posts will be devoted to this excess.
In this post, I would like to briefly describe the economic terms by answering a few big picture questions below.
What is health spending per capita and what does it mean to me?
To arrive at health spending per capita, statisticians simply add up all the money spent on health care by every American and divide it by the total number of Americans residing in the USA in any given year. Remember per capita simply means “per person”.
In 2013, our national health spending per capita was $8,713 (according to OECD information in the graph) and $9,255 according to our National Health Expenditure Accounts (NHEA). When comparing one country to the next, it is better to use all the spending values from one source (OECD). The NHEA only collects data for the United States and I will use the NHEA numbers when not comparing data between countries.
Your personal spending in any given year is one out of 315 million data points (the population of the USA in 2013). It only shows up in spending for personal health care in the equation above. The government added up every person’s spending divided by the number of people in the United States and came up with an average number ($7,826 in 2013). This figure includes payments made for all inpatient hospital care, outpatient health care, dental, prescription drugs, home care, nursing home care, and medical products for every person in the United States. If I fill in actual numbers for the three components of health spending per capita in the above equation, using 2013 NHEA data I get
I’m not sure, but the OECD health spending data may have excluded the spending for research & other component (the $522) when they got $8,713 for health spending per capita in the USA.
You may come across another measure of health spending in the United States called the Medical Expenditure Panel Survey. It is a subset of the NHEA’s national health spending per capita and includes only spending for personal health care for the civilian population (excludes the military) who are not in long term institutions (no nursing home residents or incarcerated prison inmates ). It does not include spending for administration, overhead, research, and other costs in the above equation.
What is GDP?
Why do we care how much of GDP our health spending per capita consumes? Is a higher number better or worse? Gross Domestic Product (GDP) is one of those economic measures of which most Americans are clueless. Let’s look at how it fits with health spending per capita and jobs. GDP is a measure of the economic output (all goods and services produced) of a country for a given time period. If the output is of high value and people are willing to pay high prices for it, then it will support higher wages and a relatively high standard of living. For the well-being of its citizens, all nations love to have their GDP high. GDP can be broken up into the following components:
In 2013, the GDP was $16.8 trillion and the GDP per person was $53,042. Using the OECD data in the figure above, we can see where our GDP percentage in the figure comes from ($8,713/$53,042 x 100= 16.4%). Using National Health Expenditure Accounts (NHEA) data, we get 17.4% ($9,255/$53,042 x 100).
Not all of the GDP components in the equation are of equal value in supporting high wages and a high standard of living. Health care services and products are consumed (in the first component of the GDP equation) by the American people. The government spending component of GDP is largely funded by the income taxes Americans pay. The more money people make, the more they pay in taxes, and the more money available for government spending. Everyone is happy!
In 2013, the components of GDP are itemized in the equation below:
As you can see, consumption ($11,502) is a large part of the GDP of the United States (68.5%), A nation that consumes more than it produces is not generally good for the economy. People in other countries are not buying the services in the consumption and government spending components of GDP and therefore these activities do not add to net exports (the negative number in 2013 means we imported more than we exported). Health care products, like pacemakers and MRI machines, can be exported to other countries and therefore can contribute to GDP under net exports while healthcare services are only consumed within the United States.
The money our businesses earn from the goods and services sold around the world can be used for investment for greater economic growth and job creation. Unfortunately, in the United States, it is increasingly being used to pay for spiraling health care costs. Therefore, the more businesses and the American taxpayers have to spend on health care, the less we have for investment. The less we have for investment, the fewer jobs we create.
Why should I care that health care costs are higher (as percentage of GDP) in the United States?
The more businesses have to spend on health care for their employees, the less they have to spend on the increased investment that promotes job and economic growth. When other countries (and their employers) spend less on health care, they have an advantage over the United States (and its employers and employees) in pricing and selling their output. We compete in a global economy and every advantage translates to higher value jobs and greater prosperity.
Why compare to these particular countries?
In order to compare the health care costs between different countries, you need to compare apples to apples. If the health care quality in these countries was poor, then one would argue that our higher costs buy better health care. According to data from The Commonwealth Fund, each of the industrial countries in the health spending per capita comparison has a quality of health care that is equal to or BETTER than ours. They achieve this quality of care at HALF the price! These are not the only countries with better quality and lower cost than our country (Japan, Spain, and Iceland to name a few more). These industrial countries are the ones we compete with in the global economy.
The Bottom Line
High health care costs in the United States (relative to other countries) translate to fewer jobs for Americans, lower wages, and higher taxes! We have health care costs that are TWICE as high as those in other industrial countries. Our children will have a lower standard of living if this trend continues. We want the percentage of GDP used for health spending to be as low as possible. Money spent on health care does not make us competitive on the global scale.