How Health Care Costs Wrecked Our Measures of Economic Growth

Charging more for healthcare doesn't automatically make it worth more.

Photographer: Adie Bush

Charging more for healthcare doesn’t automatically make it worth more.

U.S. growth numbers were revised this week, with fresh data for the first quarter showing the economy shrinking at an annual rate of 2.9 percent, the worst performance in five years. Economic writers quickly concluded that this isn’t quite as bad as it sounds, because a big part of the revision came from a falloff in health care spending. Instead of rising, as the government had predicted, those costs actually fell.

Cutting the cost of health care is something most people want. But if lower health care costs mean lower “growth” it raises the question of just what we mean by economic growth in the first place.

Time was when measuring what the country produced was easier. The more stuff we made, the bigger the economy was and the more stuff we had, so gross domestic product — the sum of consumer, government and business spending —  has long been used as a rough-and-ready measure of living standards.

This has always led to some paradoxes — a million dollars spent on missiles increases GDP just as much as a million dollars spent on amusement park rides. But it was useful because GDP is relatively easy to measure, while living standards are not. When alternate measures of living standards are proposed, they tend to reflect ideology as much as economics. And before the health care explosion, measuring GDP felt close enough. You might wonder if we should be counting tanks the same way we count loaves of bread, but defense spending accounts for only 4.2 percent of the U.S. economy.

Health spending is really throwing a wrench into the works. In the U.S., it is now at 17.9 percent of GDP. It’s 11.7 percent in France, at the higher end of the range for developed countries, and 9.4 percent in the United Kingdom, which is about typical. It has increased pretty much across the board.

Health-Spanding-by-Country

That seriously influences our perception of economic growth. The recession of 2001, for instance, would have appeared noticeably worse if skyrocketing health care costs hadn’t been padding GDP. Some increases in health care spending do have measurable effects on the country’s well-being. Life expectancy, for example, has been going up at a rate of about a month per year. But that has been true of other countries as well, without the U.S.-style explosion in health care costs.

It’s hard to figure out where the U.S. standard of living sits in relation to other countries’ without unpacking these numbers. When people pay more for health care, it shows up as growth in the economy. But is a $500 doctor’s visit really of greater economic value than a $250 visit?

Over the next decades, the problem of how to treat health care in measuring the economy is likely to get much worse. In 2008, a McKinsey & Company report looked at how much of the world economy health care would make up if costs kept rising. At a rate of health care inflation typical of the mid-2000s, it would make up — take a deep breath — more than 70 percent of the GDP of the U.S., France and Switzerland by 2100.

Obviously, 2100 is a long way off, and the increase in costs probably will be somewhat attenuated by then. Still, every scenario shows a substantial increase in the proportion of GDP going to health care. That will make it increasingly important to find better ways to measure the value of health care than totting up the price. And since the value of advances in health care tend to accrue to the old while getting paid for by the young, we will need to know not just how much the economy grows, but whom that growth benefits.


An earlier version of this post appeared in the Market Now daily email. Click here to register and subscribe. Or here to follow @markgimein on Twitter.

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