OP-ED

U.S. Health Care & U.S. Productivity: A Dissent

One of the great myths about American society is that our lack of a “universal” health plan harms our competitiveness.  The masters of this refrain, of course, are the American automakers.  Years before driving themselves into bankruptcy and the unwelcoming arms of their new owners, the American taxpayers, they used to claim that they spent up to $1,600 per car on health care.  This was more than they spent on steel, and a multiple of what they claimed their foreign competitors spent.  In her well received book, Who Killed Health Care? America’s $2 Trillion Medical Problem – And the Consumer-Driven Cure (New York, NY: McGraw-Hill, 2007), Professor Regina Herzlinger of Harvard Business School claims that these complaints are inflated (pp. 104-105).

Furthermore, we don’t hear Mark Zuckerberg complaining that Facebook’s health care costs are preventing him from competing against foreign social-media businesses.  Indeed, while all Americans complain about health costs, the argument that our health “system” reduces our competitiveness versus other countries with “universal” health care is actually quite weak.  Indeed, the percentage of all firms offering health benefits actually increased from 66 percent in 1999 to 69 percent in 2010, and a greater number of smaller firms have begun to offer health benefits, according to the Kaiser Family Foundation.

One oft-cited metric is that the United States spends far more on health than other countries as a share of Gross Domestic Product (GDP).  But this measurement can mislead.  It is a ratio composed of a numerator and a denominator.  The numerator – the real cost of medical care – has grown slightly slower in the U.S. than Europe.  Advocates of government monopoly health care point out that Canadian and U.S. health spending as a share of GDP was about the same before the Canadian government took over health care, but diverged starting in 1970, soon after the government completed its takeover.  They present this as evidence that the state can control costs better than the private sector.  However, real GDP growth in Canada dramatically outpaced U.S. growth between 1969 and 1987, meaning that the denominator of the health spending per GDP ratio grew much faster in Canada, not that the numerator grew much slower, according to research by Professor Brian Ferguson.

Common sense indicates that richer countries will spend more on health care.  In The Business of Health: The Role of Competition, Markets, and Regulation (Washington, DC: The AEI Press, 2006), Robert L. Ohsfeldt and John R. Schneider estimate that an increase of $1,000 in GDP per person results in a $110 increase in health care spending, if the relationship is linear.  If this is the case, then something is seriously wrong in American health care, because the United States spends far more than that for each dollar increase in GDP. However, it is more likely that nations increase their health spending at a certain rate as GDP goes up, not a certain dollar amount.  The international evidence fits the latter hypothesis much better: a thousand-dollar increase in GDP increases health spending by about 8 percent.  In this case, health spending really ratchets up as national income increases.  For example, if GDP increases from $30,000 per capital to $31,000, health spending increases by $232; but if GDP per capita increases from $40,000 to $41,000, health spending increases by $500.  According to Ohsfeldt and Schneider, this model explains 93 percent of variation in health spending internationally – much greater explanatory power than the linear (dollar for dollar) model (pp. 7-8).  Most importantly, the United States is not at all an outlier.

This finding challenges our intuition, however, because it is hard to grasp how much more the U.S. earns than other countries, and how much buying power this gives us.  According to data extracted from the International Labor Organization, U.S. GDP per capita is far greater than almost any other nations’ and this is largely due to American productivity.  U.S. GDP per person engaged (employed) in 2008 was $65,480, followed by Hong Kong at $58,605 and Ireland at $55,986.  Some of this was due to Americans working longer hours, but mostly it was due to productivity: value produced per hour worked.  Most developed countries produce between 60 percent and 90 percent of the value that the U.S. does, per hour worked.  For the four countries compared in this analysis, France was the second most productive, with a productivity rate 91 percent of the United States.  Germany lagged at 72 percent.

The table below (drawn from a recent analysis) compares the U.S. with four countries whose health care systems are often held up as admirable options: Canada, Germany, France, and Great Britain.  In all these countries, GDP per capita was significantly less than the United States.  The U.S. spent significantly more on health care per person than comparable countries.  Nevertheless, Americans still have much more money left over after paying for health care.  Indeed, we have between $4,500 and $8,400 more income per capita than Germany or France – after paying for health care – a “bonus” of American productivity.

American crusaders for “universal” health care emphasize America’s uniqueness in lacking this characteristic of the modern welfare state.  Given the benefits of America’s productivity, perhaps it is a uniqueness we should not rush to abandon.

Table 1: National Accounts for Five Countries, U.S. dollars, Purchasing Power Parity, 2008
U.S. Canada Germany France Great Britain
GDP $46,901 $38,923 $36,918 $34,641 $37,250
Health Spending $7,538 $4,079 $3,737 $3,696 $3,129
Difference $39,363 $34,844 $33,181 $30,945 $34,121
U.S. “bonus” after health spending as percentage 13% 19% 27% 15%
U.S. “bonus” after health spending in dollars $4,519 $6,182 $8,418 $5,242
Source: Organization for Economic Co-operation and Development, StatExtracts (Paris, France, Organization for Economic Co-operation and Development, data extracted November 2010).

John R. Graham is Director of Health Care Studies at the Pacific Research Institute, San Francisco, CA.

Livongo’s Post Ad Banner 728*90

Categories: OP-ED

Tagged as: , , ,

39
Leave a Reply

39 Comment threads
0 Thread replies
0 Followers
 
Most reacted comment
Hottest comment thread
19 Comment authors
John R. GrahamBarry CarolnateWendell MurrayBobbyG Recent comment authors
newest oldest most voted
nate
Guest
nate

Margalit, came across this surfing I think you would be very happy here

Frank
Guest

THEN MOVE
” .. precious little wealth created is now only trickling up ..”
Then why don’t you SOCIALISTS move to Cuba? And let 10,000 illegals fight for your spot?
When did God give you SOCIALISTS license to GRAB 60% of the EARNINGS of others?

nate
Guest
nate

“Eventually, the stagnating wages of most Americans will provide a very similar disincentive to be productive and work harder,”
Again Margalit your error is your base assumption that people who are productive and work hard have stagnating wages, if you look at movement between quintils you will see plenty of people moving up. The people that are stagnat and moving down are those with no education and working less then full time.

Margalit Gur-Arie
Guest

Nate, you have a very strange way of reaching overarching conclusions based on the few and far in between exceptions to every rule and every reality. To you wealthy translates into star athletes and rock stars, and poor translates into drunken bums loitering at a street corner. Prof. Mankiew wrote in one of his blogs that higher taxes will be a disincentive for his article writting, not because he won’t get paid, but because he won’t get paid enough to meet his expectations. Eventually, the stagnating wages of most Americans will provide a very similar disincentive to be productive and… Read more »

John R. Graham
Guest

I’m very glad people took the time to respond – even on Christmas Day! I regret I can’t wrap an “omnibus” response myself to everyone. Let me just respond to our host, Matthew Holt: I’ll never disagree that we waste much of our health spending in the U.S. However I follow Ronald Reagan in asserting lack of government control is not the problem, because government control has increased by any measure (share of spending, pages of regulation) since the 1960s. Aaron Carroll’s posts at The Incidental Economist are excellent. He has written about the increase in health spending in the… Read more »

nate
Guest
nate

“The fact is that those who get extensively rich do so because other people work hard and are very productive,” No matter how discredited you just can’t drop the dogma can you? So your saying the only reason Cliff Lee makes what he does is because his utility infielder works so hard? Taylor Swift, aka perfection, only makes what she does becuase her backup singers are so darn productive? I forget the guys name but he bet big against bank mortgages and made billions, who worked so hard to support his gamble? Your desperate and just making yourself and your… Read more »

Margalit Gur-Arie
Guest

Nate, there is no way for any one person to do any kind of work, or work any amount of hours that equates to an income as the top 1% receive. The fact is that those who get extensively rich do so because other people work hard and are very productive, but are not receiving commensurate compensation. This is not a new phenomenon and it is sustainable as long as the uneven distribution is within reason, i.e. as long as the workers improve their lot in direct proportion with the property holders. It is not acceptable, and it is dangerous,… Read more »

Barry Carol
Guest
Barry Carol

Margalit – While my own preference is to see prosperity widely shared as opposed to concentrated in the hands of the few, I see plenty wrong with the current system that doesn’t involve the wealthy. First, there is no doubt that wages have stagnated for many. Before the small software company my wife worked for was sold last year, she was earning roughly the same as a software developer in inflation adjusted dollars as she was when she worked for IBM as a programmer in 1976. Many in the unionized manufacturing sector fared far worse, though that was partly due… Read more »

nate
Guest
nate

Great example of liberal thinking on another hot button issue; ” Prognosticators who wrote the U.N.’s Intergovernmental Panel on Climate Change, or IPCC, global warming report in 2007 predicted an inevitable, century-long rise in global temperatures of two degrees or more. Only higher temperatures were foreseen. Moderate or even lower temperatures, as we’re experiencing now, weren’t even listed as a possibility. Since at least 1998, however, no significant warming trend has been noticeable. Unfortunately, none of the 24 models used by the IPCC views that as possible. They are at odds with reality.” who needs reality when you have progressive… Read more »

nate
Guest
nate

Margalit that is the difference between facts and opinions, I don’t care what Mr. Greenspan opinion is as he hasn’t shown himself to be particulary good at these matters. Now lets look at the facts; You said “precious little wealth created” Factually untrue “The poor and middle class are indeed left with exactly what they had before” You just admitted this is also factually untrue “Most often it accrues to those who are already wealthy and have the financial means to extract wealth from the system.” Also factually untrue. So you make an argument that is lacking any fact and… Read more »

Margalit Gur-Arie
Guest

Nate, not sure what the link you posted means, but I think you really meant to post this one
http://en.wikipedia.org/wiki/Income_inequality_in_the_United_States
Did you read it? Perhaps in addition to what you selectively quoted from it, you may also want to quote Mr. Greenspan on US income inequalities:
“As I’ve often said, this is not the type of thing which a democratic society – a capitalist democratic society – can really accept without addressing.”
109% of $40,000 is $43,600, and 276% (yes 276%) of millions and billions is almost triple as many millions and billions. Who are we kidding here?

Barry Carol
Guest
Barry Carol

Just to follow up, the dividend income accruing to the founders of Google and Berkshire Hathaway from their huge ownership interest in those companies is precisely ZERO as is the associated income tax liability because these companies don’t pay any dividends. They reinvest all of their profits back into the business to build long term value for all shareholders and, by the way, increase their workforce to support the growth of the business. Bill Gates pursued the same strategy at Microsoft for much of its early history though MSFT does pay a meaningful dividend now. Many of the countries wealthiest… Read more »

nate
Guest
nate

Today, the expenditures per person of the lowest-income one-fifth (or quintile) of households equal those of the median American household in the early 1970s, after adjusting for inflation.[6] The way the left frames these arguments could not be more dishonest. At least I hope it is framing and they aren’t really this clueless. If not for the efforts of our evil rich how is our bottom class living like the middle class just 40 years ago? Considering education is declining and so many are state dependent someone is obviously generating termendous amounts of wealth to drag them up with little… Read more »

Barry Carol
Guest
Barry Carol

The trend toward increased concentration of wealth over the last 30 years has very little to do with federal income tax policy. While marginal income tax rates were far higher in the 1950’s and early 1960’s, very few people actually paid them. Tax shelter opportunities abounded that allowed wealthy people to borrow money on a non-recourse basis for investment in oil and gas, real estate, cattle and other ventures. Even if the investment was a bust, they could often write off up to 5 or 6 times the amount they actually had at risk and save far more in taxes… Read more »

nate
Guest
nate

“precious little wealth created” By who’s measure? The facts would seem to show your either full of it or the worst propogandist ever. http://en.wikipedia.org/wiki/File:Graphic.png Huge amounts of wealth have been created. “The poor and middle class are indeed left with exactly what they had before” “The real, after-tax income of the top 1% earners has grown by 176% percent during that time, compared to a 69% rise for the top 20%, and an increase of 9% for the lowest 20%[1].” 169% is nothing? 109% is nothing? And that is just reported income, non reported income and non income assistance adds… Read more »