How Much Does Healthcare Spending Matter?

I now want to address a fascinating question, about which there is considerable debate. One person who thinks we are getting a good deal for the money we spend on healthcare is Harvard University health economist David Culter. A 45-year-old man alive in 1950 had few effective treatments for today’s most common killer, heart disease. At that time, little was spent on treatment or prevention. Today, such a man can expect to spend more than $30,000 (in 2004 dollars) on treatment of heart disease over the course of his remaining life, according to Cutler. The benefit: he can expect to live about 4.5 years longer. At a cost of $6,667 per extra year of life, this is a terrific return on our investment in health. In terms of the benefits of healthcare, we largely get a good deal for what we pay for, he argues. Although medical care consumes a greater portion of our economy than in years past, we get a lot back in return.

The reduction in physical disability is another advance that Cutler attributes to the marvels of modern medical science. Thirty years ago, one-quarter of the elderly population was unable to live independently. Hip and knee replacements and other advances have reduced that number to less than one in five today. That’s why the nursing home population has hardly changed in the past couple decades or so, he argues.

Against this view is a growing body of research that is highly skeptical about what we are getting for our healthcare dollars—at least at the margin.

In chapter 1 of my book Priceless: Curing the Healthcare Crisis, I noted that although the Medicare program led to an enormous increase in healthcare spending, it apparently had no effect on the life expectancy of the elderly. Some readers may be surprised at that result. If so, I have a few more surprises for you. People with high-deductible health insurance spend about 30 percent less than people with first-dollar coverage; yet, this lower level of spending apparently has no adverse effect on their health. People without health insurance at all spend about half of what insured people spend, but, again, with no obvious impact on their health.

Imagine that you are in an automobile accident. An ambulance rushes to the scene and the emergency medical technicians and then the emergency room doctors save your life. This is the image of heroic medicine that a lot of people project on the entire healthcare system.

But suppose you are choosing to live in one of two cities, and City A spends twice as much on medical care per citizen as City B. City A has more doctors, more medical equipment, more hospital beds; and doctors in that city do more things. Would your life expectancy be longer if you choose to live in City A rather than City B? Probably not.

Researchers have studied this question across the fifty states, across hospital regions, and across Veterans Affairs regions and found that large variations in healthcare spending apparently have little, if any impact on overall population mortality. George Mason University economist Robin Hanson summarizes the literature this way:

[H]ealth policy experts know that we see at best only weak aggregate relations between health and medicine, in contrast to apparently strong aggregate relations between health and many other factors, such as exercise, diet, sleep, smoking, pollution, climate, and social status…. For example, [one study] found large and significant lifespan effects: a three year loss for smoking, a six year gain for rural living, a ten year loss for being underweight, and about fifteen year losses each for low income and low physical activity (in addition to the usual effects of age and gender).

This conclusion is important to keep in mind as we evaluate the likely impact of health reform. The nation as a whole is probably going to vastly increase the amount we are spending on healthcare. Yet, if we want to improve the nation’s health, there may be wiser ways to spend that money.

[Cross-posted at Psychology Today]

John C. Goodman is a Research Fellow at the Independent Institute, President of the Goodman Institute for Public Policy Research, and author of the Independent books, Priceless: Curing the Healthcare Crisis and A Better Choice: Healthcare Solutions for America.
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