Learning to Love Health Care Spending

frfogelOne of the major goals of the health care reform effort that has dominated political discussion for the past year has been reining in medical spending. Oft quoted is the fact that U.S. health care expenditures have tripled since 1990, that the health care industry comprises a whopping 16% of U.S. GDP, and that each American citizen spends over $7,000 per year on health care, higher than any other country, all despite ranking merely 50th in the worldwide competition for life expectancy. To many, these spiraling figures are a cause for concern, a runaway train that needs to be slowed down through government intervention and industry reforms. But to Robert Fogel, University of Chicago economist and 1993 Nobel laureate, these figures were not worrying omens, but positive signs of a healthier world and a thriving health care industry.

Fogel expressed these views during his talk to a packed room of doctors and ethicists Wednesday as part of the MacLean Center for Clinical Medical Ethics lecture series. Titled “Forecasting the Cost of U.S. of Health Care in 2040,” Fogel’s predictions and figures seemed to feed people’s worst fears about rising costs of health care – for example, during the Q&A portion following his talk, he estimated that health care will comprise 29 percent of the U.S. GDP by 2040, drawing gasps from the crowd. But uniquely, Fogel stressed that such an increase was not a bad thing, taking the minority position (albeit a very University of Chicago economics one) that there is no need to restrict health care spending because it’s what the people demonstrably want.

The key statistic that informed Fogel’s conclusion was that American households, when they gain an extra 1 percent of income, spend an average of 1.6 percent more on health care. Americans have a demand for higher quality health care, and as basics like food and shelter cost less, they choose to spend more of their income on attaining that medical quality – “the long-term inelasticity of the demand for health care,” as he put it in economicsese.

“Consequently, there is no need to suppress the demand for healthcare,” Fogel said. “Expenditures on health care are driven by demand, which is spurred by income and by advances in biotechnology that make health interventions increasingly effective…health care is the great growth industry of the 21st century.”

In less formal terms, Fogel told the story of when his wife fell ill on a trip to Europe. At an emergency room in London, a doctor listened to his wife’s chest and diagnosed with her pneumonia, prescribing her an antibiotic. In America, Fogel said, an emergency room could make the same quick, cheap diagnosis, but would want to support it with additional tests to rule out other diseases. And unlike hospitals in America, she would be put in a room with a television, personal telephone and other amenities – “luxury elements,” as he put it – unlike the spartan environment of the European hospitals.

“We spend a lot of money on discovering whether there is something beyond which you can hear with a stethoscope,” Fogel said. “I don’t buy the view that it’s excessive, that it’s pushed by mercenary people in the health care system. I think it’s driven by consumer demand. We just like all of these things, we want to be pampered, we want to make sure by checking and re-checking results.”

Another driver of increased health care spending in the future, according to Fogel’s calculations, will be an uninterrupted rise in life expectancy, a figure that already nearly doubled over the course of the 20th century. Pessimistic observers cited by Fogel believe that rate can’t keep up the pace in the 21st century, given that the most beneficial gains (such as reducing infant mortality) will reach a ceiling effect. Fogel disagrees, and said he expects the life expectancy curve to continue along its sharp upward slope with gains of more than 2 years each decade.

“The outlook is very good. I expect my grandchildren to have a median length of life of over 100 years,” Fogel said.

All those additional elderly people won’t strain the health care system too severely, Fogel predicted, citing medical advances that have decreased the severity of chronic disease and “pushed back old age.” One graph showed that the financial burden of health care in people older than 85 was six times as high as for people in their lower 50’s, but another showed that the bulk of expenditures were in the last two years of a person’s life. Push life expectancy higher, and those end-of-life costs will move to older ages, rather than all of the “elderly” age groups spending significantly more.

Provocative? For sure. And murmurs from the crowd after the lecture suggested that some of the clinicians in attendance weren’t buying Fogel’s contrarian arguments about the future of their field. But after a year of hearing largely political opinions on health care, it was refreshing to hear from an outsider – even if he was only visiting from the other side of campus – willing to dig deep into the numbers.

To read more on Fogel’s analysis of aging and health care spending, you can read his 2005 working paper, “Changes in the Physiology of Aging during the Twentieth Century.”

About Rob Mitchum (525 Articles)
Rob Mitchum is communications manager at the Computation Institute, a joint initiative between The University of Chicago and Argonne National Laboratory.
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