Could Wasteful Healthcare Spending Be Good for the Economy?

Suppose I throw a rock through a store owner’s window. You admonish me for this act of vandalism. But I reply that I have actually done a good deed.

The store owner will now have to employ someone to haul the broken glass away and someone else, perhaps, to clean up afterward. Then, the order of a new glass pane will create work and wages for the glassmaker. Plus, someone will have to install it. In short, my act of vandalism created jobs and income for others.

The French economist, Frédéric Bastiat called this type of reasoning the “fallacy of the broken window.” All the resources employed to remove the broken glass and install a new pane, he said, could have been employed to produce something else. Now they will not be. So society is not better off from my act of vandalism. It is worse off — by one pane of glass.

But there is a new type of Keynesian (to be distinguished from Keynes himself) that rejects the economist’s answer. Wasteful spending can actually be good, they argue. If so, they will love what happens in health care.

By some estimates one of every three dollars spent on health care is unnecessary and therefore wasteful. ObamaCare’s “wellness exams” for Medicare enrollees — so touted during the last election — is an example. Millions of taxpayer dollars will be spent on this service, yet there is no known medical benefit. Similarly, ObamaCare is encouraging all manner of preventive care — by requiring no deductibles or copayments — which is not cost effective.

Yet all this wasteful spending could actually help the economic recovery according to the resurrection of an old Keynesian idea called the “liquidity trap.” Here is New York Times columnist, Paul Krugman:

As some of us keep trying to point out, the United States is in a liquidity trap: […] This puts us in a world of topsy-turvy, in which many of the usual rules of economics cease to hold. Thrift leads to lower investment; wage cuts reduce employment; even higher productivity can be a bad thing. And the broken window fallacy ceases to be a fallacy: something that forces firms to replace capital, even if that something seemingly makes them poorer, can stimulate spending and raise employment.

John Cochrane provides further explanation:

“Fiscal stimulus” is the prediction that even completely wasted government spending is good for the economy. Paul Krugman recommended, with refreshing clarity, that the U.S. government fake an alien invasion so we could spend trillions of dollars building useless defenses. (I’m not exactly sure why he does not call for real defense spending. After all, if building aircraft carriers saved the economy in 1941, and defenses against imaginary aliens would save the economy in 2013, it’s not clear why real aircraft carriers have the opposite effect. But I’m still working on the nuances of new-Keynesianism, so I’ll let him explain the difference. I’m not a big fan of huge defense spending anyway.)

According to new Keynesianism, we are in a liquidity trap when nominal interest rates hit zero. At that point, according to the theory, hurricanes and earthquakes are good for the economy. So are sudden increases in the price of oil.

A new paper by Johnnes Wieland, tests some of these predictions. As summarized by Cochrane:

Johannes looks at the earthquake in Japan, and oil price shocks. Surprise, surprise, earthquakes are bad for output…[and] he finds that oil shocks have worse negative effects on employment at the zero bound than in normal times!

John C. Goodman, PhD, is president and CEO of the National Center for Policy Analysis. He is also the Kellye Wright Fellow in health care. His Health Policy Blog is considered among the top conservative health care blogs where health care problems are discussed by top health policy experts from all sides of the political spectrum.

25 replies »

  1. Wasteful healthcare spending could be good for the economy but is terrible for society. Car accident victims are a good example of this. If a victim of a motor vehicle comes into the ER and requires life saving procedures, it will require a great deal of resources and skilled providers such as surgeons and other specialist. The victim may not fully recover and will have to spend years out of work and in rehab. Preventative medicine can never produce the dramatic visible results that a surgeon can show by saving the life of a car accident victim. But implementing policies, laws, and designing cars and streets to be safer will save lives and reduce debilitating injuries. These preventive measures can save a society a tremendous amount of money and keep potential victims working and being productive to society. And all those resources spent on the car accident victim could be spent treating another disease or illness if that car accident never happens in the first place. In the end it comes down to where the resources and money spent could be best allocated to benefit society the most.

  2. “American payors have given themselves no weapons.”

    We have been disarmed by the medical/industrial/political complex.

  3. Both public and private insurance plans leave a great deal of room for “upcoding”. This means higher bills and higher claims, even when the number of persons insured does not grow at all.

    For example, Medicare in 2000 paid for 13 million hospital admissions and the cost to Part A was just under $100 billion.

    In 2010, Medicare Part A paid for 13 million hospital admissions and the cost was over $180 billion.

    Hospitals learned to admit more patients into intensive care, and to maximize reimbursements based on the diagnostic code (DRG’s).

    Countries have binding national fee schedules have learned to fight this battle. As you point out, American payors have given themselves no weapons.

    Just one point in addition — we could wipe out medical school debts for less than $30 billion a yearin federal spending ongoing. We could forgive a large chunk of existing debt also.

    This would be money well spent, as opposed to overpaying doctors for the rest of their professional life,

  4. Insurance premiums go up simply because the bills go up. And those bills originate with providers. All the “downward pressure” in the world isn’t going to get results as long as premiums are tax-advantaged and employer contributions are deductible business expenses. Tax policy and GAAP have the effect of sheltering medical bills from close scrutiny. And in most settings there is no real competition. I don’t know about other places but where I live competing systems cannot be built without prior approval requiring a CON (certificate of need), a politically generated official document with a totally misleading name. Certificates of need are never or rarely issued for places where there is an actual need such as a poor part of town or in a rural community. The reason is simple — there is no competition for those places where real needs are not matched by money.

    During the Bush administration a proposal which originated with AEI (hardly a Liberal bastion) which proposed what strikes me as an excellent suggestion — uncouple employment from insurance altogether, not all at once, but pushing the current system in that direction by crafting tax policy to move insurance in that direction.


    Take a look at that document and see what I mean. In a global economy employers already have competition enough without having to include the cost of health care in every product they are trying to sell when similar products are coming from other countries in which basic health care is a universal, tax supported, typically with cost controls.

    These are treasonous ideas I am advancing. Just ask any medical professional making payments on a second home or salting assets away in a sheltered trust for his heirs. Or ask any newly-minted medical student, matriculating up the ladder, facing student debt in the mid to high six figures and see how they like the idea of being compensated less. (Which brings up another problem — the outrageous costs of training and development of medical professionals. There are timid advances buried in the bowels of ACA — like loan forgiveness in return for time in an “under-served” area or working for a non-profit — but the incentives are not stellar enough to attract any serious numbers of people when the lights are so bright in the big time.)

  5. Margalit, you are correct that it is cruel and crazy to make the individual patient into a kind of kamikaze of cost control.

    No other industrial nation would consider asking its population to refuse care and, effectively, suffer and die, so as to challenge high medical bills.

    This is just cowardice, as opposed to doctors and hospitals which post unconscionable bills.

    Bob Hertz The Health Care Crusade

    John, the maddening thing to me about group insurance to me is that the carriers do exert price restraint. And yet premiums go up every year.

    This is mainly due to an actuarial death spiral. The medium sized employers who cover their workers are shrinking. The large employers with healthy workforces are mainly self funded.

    What is to be done?Let’s keep talking.

    Bpb Hertz, The Health Care Crusade

  6. For some of us spending money on a dog’s health is in the same category as spending money on one’s own health or the health of one’s other family members. I don’t know if these are investments or expenses, since, as Peter writes, not all health spending has tangible returns to the one that spends the money. Children’s future earnings are rarely a consideration for a parent spending that million dollars on a sick kid.

    Point is that in health care for human or non-human family members, pricing cannot be driven by the consumer.

  7. Pets can be an investment in personal well being. Some will argue that people who keep and love their pets experience better health.

    Would putting granny on DNR be a way to cut expenses while spending a million dollars on a child’s health care be an investment?

  8. Margalit, for my answer to your question about pet care I refer you to my comment above pointing to the difference between investments and expenditures. There is a qualitative difference. that makes them different from person to person depending on their social and wealth status. One person’s investment is another person’s expenditure. In short, pets and pet care are expenses, not investments. Take horses, for example. I’m not in that league, but if I were I would regard my horse as an expense, not an investment. But for some people with far more wealth than I (Would it be tacky to mention Mrs. Romney here?) horses are more than an expenditure.. They can be an investment. Show horses, race horses, they have value in many cases for stud fees alone, years after their glory days are behind them. And that revenue stream pays for their upkeep many times over.

    Short answer: pets and pet care are expenses. Personal and family medical care are investments in future earnings and minimizing future expenses.

  9. bob, my understanding of the system was informed by Paul Starr’s Social Transformation of American Medicine, somewhat dry and academic, but the gold standard for anyone wanting to know about the subject, and Maggie Mahar’s Money Driven Medicine.

    If I recall correctly, right after the war the first of the group insurance products came along in the form of the original Blue Cross. It was for hospital care only and was an attractive company benefit aimed at attracting good people from other companies that may not have had it. The doctors, aka AMA, were absolutely opposed to the idea, suspicious of anything big and afraid that hospitals would be competing for patients. But they realized that the practice of medicine was impossible without hospitals, and when their fears didn’t come to pass, the insurance people advanced the Blue Shield model to form groups to pay for professional services in addition to hospital charges. Again the doctors were opposed, fearing price controls which during the war made their fears more than imaginary. The only way that AMA went along with both insurance models was that all hospitals would be non-profit and there was a tacit agreement that there would never be any interference from government messing with physician charges (price controls).

    This was my impression of the background, the health care industry being wed to the insurance industry. Until the Sixties all hospitals in the country were non-profit until the profitability possibilities were exploited in the name of “size, efficiency and the economy of scale” by entrepreneurs with profit motives. It may have been HCA or some other outfit that aimed to do with hospitals what McDonald’s was doing with hamburgers. I don’t know. Again, I’m just reeling out my understanding and I’m certainly open for correction. But I think this is more or less accurate.

    I have been arguing the case against the fallout of this incestuous relationship between insurance and medical care for a long time, most recently in another comments thread.

    And here as well

    But the problem in America, unlike the other countries you mentioned, is precisely the prohibition of price controls — for either medicine or services — that other countries have no compunction about making in the interest of public health. The early fears of doctors (and now even so-called not-for-profit hospital systems with “competitive” executive compensation packages) were long ago made real in other countries. But in America, where ain’t nobody gonna tell the private sector how to run their business, where any kind of regulation or control is seen as just another step toward socialism, the best the government can do to “bend the curve” is negotiate with the private sector, hoping for the best against a large and growing army of lobbyists who have more elected representatives in their pockets than any crime boss.

    It is no accident that Medicare Part A is modeled after the original Blue Cross (hospital) coverage and Part B (professional services) is an echo of Blue Shield. It took a few years more, but the pharmaceutical-industrial complex finally got into the comfort zone with the hugely wasteful Medicare Part D which was not even funded — coming from general revenue!! And now we wonder why the budget is out of balance. Don’t get me started….

    Any way, Medicare, even now, doesn’t actually tell anyone what to charge. All the government can do is publish a schedule of reimbursements which is waaay different from what doctor, clinics, hospitals and others actually put on their bills. The difference, of course, is picked up by “supplemental insurance” which in turn is tax-advantaged thanks to the sweet political arrangements that industry has crafted with politicians of both parties over the several decades.

    I could rant on for pages like this, but I think anyone can see the points I’m making.

  10. These are good points Margalit. Most vets are paid with cash yet none (I’ve seen) advertise or post prices. There is no outward price transparency in the vet business, in fact I’ve never had a vet offer costs estimates for treatment even when the pet may require extensive surgery/treatment. I had one vet say that if she brought up price the owner may decline treatment. Only having several pets do people get an idea of possible costs.

    My personal observation is that you spend $500 then the pet dies anyway.

  11. Let me ask both of you a quick question. I just took my dog to the vet last week and he got a couple of shots and a well-dog exam (or whatever they call it). It was $250. I paid and left and then I got thinking.
    I’ve had dogs and cats all my life. I never shopped around for a cheap vet, but did shop around for the best vet, particularly when I had one dog with a life threatening disease. I never asked how much things are going to cost in advance, but I remember the emergency clinic trying to tell me once and I just said the usual do whatever you need to do to make him better.

    Now, I know that some people think differently about pets and price awareness may be a factor in deciding course of “treatment”, but there is absolutely zero chance that the same folks will transfer that way of thinking to their wife/husband/baby.

    So…. what makes us think that people can drive costs of health care down on their own? Why are we assuming that everybody will shop around for the cheapest doctor? or are we assuming that only “certain” people will be forced to shop around for cheap doctors?
    If all that transparency in pricing comes to pass, and if I were a high priced provider, I know exactly what my marketing campaign would look like….

  12. Good points, John, but I want to explore your statement that using tax money for health care leaves no motivation to drive prices down.

    Canada, Germany, Japan, France, and Sweden all use mainly tax money for health care, and they are driving prices down all the time. The maximum allowable price for an MRI in Japan is $98.

    That is because they have real budgets for health care, not ‘mandatory spending.’ Legislators are often forced to make real choices between more money for health care vs other social programs.

    In America, Medicare and Medicaid actually do exert price controls — but only for their own enrollees. The prices that Medicare pays are not that far from European levels. The prices that Blue Cross pays are in some cases not that far from European levels.

    But in the US, Doctors and hospitals then raise prices for everyone who is not on Medicare or Blue Cross. And boy do they raise prices, sometimes by a factor of five or ten times.

    In theory, America could have national fee schedules that controlled prices
    and even had some control over utilization, We just don’t.

  13. Since you asked, I have two observations. One has to do with the source of the money being spent, the other with unintended consequences.

    By definition all government spending is either tax money or funds borrowed by taxpayers (bonds) which must be repaid, typically with interest. Next time you come across someone complaining about “redistribution of wealth” remember that taxes, tax policy and any rules policing the economy result in redistribution of some kind. I don’t object to that type of redistribution, by the way. That is why we have taxes and government spending. And when jobs are created in the process that is not only a positive result, it is the only result, since goods or services are by definition why all money is spent.

    But there is a qualitative difference between spending and investing. “Investing” is putting wealth aside with the expectation that it may increase, or at the least not be lost. “Spending” on the other hand, is disposing of wealth, enjoying its benefits, knowing that it is vanishing before your eyes. At different layers of society the definitions can change. Some people can “invest ” in collectible art, antiques, autos, etc. But in my lifestyle art, old furniture and cars are nothing more than decorations, practical needs and reliable transportation, if you can see the difference.

    So when my tax money is being spent, I want it to be an investment, not an expenditure. I don’t mind money spent on education or a safety net for the poor any more than I care about replacing light bulbs or a worn-out vacuum cleaner or taking care of an aging parent or neighbor. Those are expenses that are part of living. But I have a much different attitude about tax money fattening the profit margins of trans-national corporations with executive compensation packages and golden benefit plans for highly-paid workers. Hopefully anyone can see the difference.

    In the case of health care in America, Medicare, Medicaid and group insurance have resulted in most of the country having no clue about how much their health care really costs for two reasons. First, most people are not sick or injured, so when they access the system they are more interested in having their problem taken care of than “shopping for the most economical alternative.” Besides, most of the alternatives are not realistic due to “out of network” or “your plan does not cover” rules.

    Furthermore, as long as it is tax money or tax-advantaged group insurance picking up the lions share of costs, there is little or no motivation for anyone to drive prices down. When did any hospital, clinic, imaging center, lab or private practice try to attract business by advertising lower prices? The only time that happens is with corrective lenses and dental work, and in most cases those are bait-and-switch offers attracting (ready for this?) expenditures not investments.

    The downside of health care as a jobs creator or economic stimulus is not as bad as body bags, PTSD, suicides and VA care which are the prices we pay for the military-industrial complex. But over time it results in a steady inflation of prices as beneficiaries use the system with little or no motivation to seek more economical options (“Doctor, do all you can… I’m in pain, make it stop…. Is my little boy gonna live?…Is this the best on the market?… I saw something on TV the other nite…. Can you refer me to a specialist?… “).

    It’s been going on now for almost three generations to the point where health care costs in America are the highest in the world. And those who think we have the best system on the planet are living in a denial bubble. It may be the best for those who can afford it, but that is a small and shrinking part of the population. And that is why thinking of health care as a jobs plan or economic stimulus is magical thinking.

  14. Bob, substitute Medicare/Healthcare with Defense and could/would you make the same justifications for the spending?

  15. I have delved into this issue many times during my health care research of the last 20 years,

    Here are a few comments.

    1. A billion dollars spent on Medicare seems to produce more jobs in the USA than a billion dollars returned to taxpayers.

    Medicare results in the hiring of nurses, technicians, etc in the USA.

    Taxpayers might buy foreign products, or, if they are wealthy, take trips to Europe, China, Israel, etc.

    2. Many families have stayed in the middle class because the wife got a good nursing job, even if the husband was laid off at the factory.

    3. Hospitals are the major employers in many cities, and not just of medical personnel. Hospitals have also sustained the construction industry

    4. As productivity has reduced factory employment, many parts of health care are blissfully unproductive.

    Nurses in many hospitals take care of fewer patients every year, yet their salaries have gone up more than most other professions.

    Nursing schools and medical schools turn out the same number of graduates, but the salaries of teachers go up every year.

    Health insurance companies produce nothing, really, but their salaries go up also.

    In the short run, health care and the housing industry (until 2008) have propped up the American labor market. These industries created jobs that could not be offshored or automated. Read Michael Mandel for more details.

    Does this have long term consequences? Beats me. Comments welcome.

    Bob Hertz, The Health Care Crusade

  16. Exactly.

    “Could Wasteful Healthcare Spending Be Good for the Economy?”

    Some parts of it. Even in a zero- or negative sum game there are nominal “winners” — for a time.

  17. As predictable misrepresentation of Keynes as we might well expect. More broadly, this article is a waste of space.

  18. John- Did you ever actually read Keynes? I think the term Keynesian has become meaningless and just used as a pejorative.


  19. No A wasteful spending in healthcare will not be good for economy as if your are not spending in right areas than how could your expect some better results.

  20. sigh – John

    If we were on t.v. I’d beat my head against the studio desk

    thunk thunk thunk

    “there is no evidence that preventative care has a medical impact”

    is there any evidence that defense spending saves lives by preventing war?

    any evidence that state department spending prevents conflict?

    any evidence that locking up serial killers prevents criminal activity?

    I need studies

    what? you don’t have any?

  21. Could have, would have, but the window fixers are not employed to produce something else, because the shopkeepers choose to sit on large piles of cash and do nothing.
    If I am not mistaken, the correct link to Mr. Krugman’s article is suggesting investment in the environment, where every possible window has been already wantonly broken by the righteous shopkeepers.

  22. You want spending?
    You got it.

    The footprint of most health care systems in America is often as big as an industrial park. There are so many clinics, labs, private practices, specialty centers, agencies, imaging centers, retail outlets selling durable equipment and disposables, pharmacies, the list is endless… And that doesn’t take in to account the ancillary non-medical businesses from window-cleaning, landscaping and waste removal to uniform sales, food service outlets and parking garages. It takes your breath away to think of it. And every dollar supporting this is in one way or another the cost of health care in America. Every dime feeding this monster begins with a charge for someone’s medical bill.

    Healthcare systems should not be much bigger than a good-sized hospital. And they should be scattered far and wide, like grocery stores, in proximity to the places where health care is needed — NOT in the most affluent parts of the metroplexes where they are now concentrated. A more robust system of community health centers will be part of that picture. And that, too, is part of the vision of ACA.

    Complaining about stimulus spending is a smoke screen to distract from embedded toxic systems already in place. Ike’s military-industrial complex has not only grown, but has been amended by similar toxic tax-money-to-privatization schemes involving prisons, education, medical care and prescription drugs. This kind of argument is really tiresome.