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NRO’s domestic-policy blog, by Reihan Salam.

Ezra Klein on the Growth of Health Spending



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At Wonkblog, Ezra Klein makes two arguments regarding the welfare state. First, he observes that Germany engages in somewhat more social spending than Greece, yet Germany is in relatively good fiscal health. This, he seems to suggest, tells us that social expenditures per se aren’t at the root of Greece’s fiscal crisis. This seems fair enough. A deeper problem might be that Greece has a highly inefficient state and pervasive corruption, both of which mean that tax dollars aren’t effectively channeled into useful social expenditures. This, in turn, undermines trust in the Greek state, which tends to depress the collection of tax revenue. Another way of putting this is that Greek efforts to mimic the social model are likely to end in failure, as Greece is in many respects quite different from Germany.

Interestingly, Germany and Greece have diverged on social expenditures. Greece increased social spending between 2000 and 2007 from 19.2 percent to 21.3 percent. Germany decreased it from 26.6 to 25.2 percent. German social expenditures had increased until reaching a peak in 2003, after which point they declined considerably. This retrenchment may have contributed to Germany’s ability to ramp up social expenditures once the 2008 crisis hit. Moreover, the German economy is considerably larger than the Greek economy, which might might it somewhat easier for the Germans to sustain a higher level of social expenditures.

One of the fastest-growing economies in the OECD, South Korea, has a GDP per capita (PPP) of $30,000 as opposed to a Greek GDP per capita (PPP) of $29,600 — quite comparable. Social expenditures in South Korea increased between 2000 and 2007 sharply, from 4.8 percent to 7.5 percent. It is not obvious that Greece’s much higher level of social expenditures have left the country better-positioned for future economic growth and human development than South Korea, though of course opinions will vary on this question. Mexico, with a GDP per capita (PPP) of $13,900, less than half the level of Greece or South Korea, saw its social expenditures increase modestly over the same period, from 5.3 to 7.2 percent. One could make the case that looking at the level of social expenditures isn’t in itself very informative — we need a better understanding of the context, including how well social expenditures are deployed. 

Ezra Klein’s second point reads as follows:

To bring this across the Atlantic, you could argue that the United States’s debt burden is the product of an insufficiently large welfare state — at least with regard to health care. To see a stark illustration of that thesis, head to the Web site of the Organization of Economic Cooperation and Development and download their health-care statistics for Canada and the United States.

As recently as 1965, the cost of those two systems competed neck-and-neck. That year, Canada spent 5.9 percent of its GDP on health care. The United States spent 5.7 percent. But around that time, Canada was transitioning to its current single-payer system. Over the next four decades, the growth of health-care costs slowed in Canada while it accelerated in the United States. By 2009, Canada was spending 11 percent of its GDP on health care — and covering everyone. The United States was spending 17.4 percent of its GDP and leaving 45 million uninsured. In dollar terms, we’re spending $3,600 more per person, per year, than Canada.

If the United States had Canada’s health-care system, and Canada’s per capita health-care costs, we would have a much “larger” welfare state, but we wouldn’t have a deficit problem. Assuming we weren’t spending that money elsewhere, we wouldn’t even have a deficit. Likewise, if any country in the euro zone maintained the United States’s health-care system and our health-care spending, it would have a smaller welfare state, but it would be sagging beneath a debt burden far more onerous than anything anyone in Europe is facing today. [Emphasis added]

By saying that “over the next four decades, the growth of health-care costs slowed in Canada while it accelerated in the United States,” we get the impression that this trend operated throughout the 40-year period. 

Last month, we discussed a fascinating post by Noah Millman at The American Scene. Part of it reads as follows:

[I]f we look at spending on an internationally comparative basis, and look at percentage changes here and elsewhere, they aren’t rising very rapidly here. From 2002 to 2008, US per-capital health-care spending grew a bit faster than five and a half percent a year. That puts us in the middle of the pack of industrialized countries; Dutch spending grew nearly 7% per year, Canadian spending more than 5.7% per year, and UK spending more than 7%; by contrast, French spending grew less than 4.5% per year and Swiss spending grew a bit more than 5%. A similar picture obtains if you look back at the previous six-year period; American health-care spending per-capita grew a bit under 6% per year in that period, a slower rate of growth than the Dutch, British, Danes or Swedes, but faster than the French or Swiss, much faster than the Germans, and slightly faster than the Canadians.

The problem is not primarily the high growth rate of our health-care spending; the problem is precisely the high level of our health-care spending. Which in turn means that a growth rate that looks reasonable when compared internationally is unsustainable in terms of the bite it takes out of the domestic economy.

We got into this mess primarily because our per-capita health-care spending growth rate didn’t slow as quickly as our peer countries. Back in 1972, American health care was already dramatically more expensive on a per-capita basis than the British system, which operates very differently. But it was only modestly more expensive than Danish, Swedish, Canadian, German or Swiss health care. And health care expenditures were rising across the board in this period. From 1972 to 1978, American health care expenditures per-capita grew by a bit over 12% per year. But German per-capita expenses went up by 14%. British per-capita expenses went up by just under 12%. French per-capita expenses went up by over 13%. Swiss expenses went up by 11.3%. And this was the era of double-digit inflation; similar increases in prices and wages in all sorts of sectors were normal.

The problem is that America maintained a very high rate of growth in per-capita health care expenses well into the 1980s, well after inflation in general was tamed, and didn’t bring our growth rates down to internationally comparable levels until the 1990s. From 1978 to 1984, America’s per-capita health-care expenses grew nearly 12%, versus a bit over 8% for the Netherlands and a bit over 9% for Germany. In the next six-year period, America’s expenses grew over 9%, versus less than 7.5% for the Netherlands and a bit over 5% for Germany. Similar comparisons obtain with Switzerland, Canada, Belgium, the UK, France. It was in the 1980s that American health care went from being modestly more expensive than other wealthy countries with mixed public-private systems, to being wildly more expensive than other wealthy countries with mixed public-private systems.

Because we’re growing off such a high cost base, even as we have dramatically reduced the rate of growth of per-capita health-care expenditures the absolute bite we’re taking out of GDP is getting out of hand. From 1978 to 1990, German heath-care expenses as a percent of GDP did not change; they were 8.4% at the start of that period and 8.3% at the end. During the same period, American health care expenses as a percentage of GDP went from 8.4% – the same as Germany – to 12.4%, a nearly 50% increase in relative share of GDP. [Emphasis added]

To zero in on the U.S.-Canada comparison, recall the following:

From 2002 to 2008, US per-capital health-care spending grew a bit faster than five and a half percent a year. That puts us in the middle of the pack of industrialized countries; Dutch spending grew nearly 7% per year, Canadian spending more than 5.7% per year, and UK spending more than 7%; by contrast, French spending grew less than 4.5% per year and Swiss spending grew a bit more than 5%. A similar picture obtains if you look back at the previous six-year period; American health-care spending per-capita grew a bit under 6% per year in that period, a slower rate of growth than the Dutch, British, Danes or Swedes, but faster than the French or Swiss, much faster than the Germans, and slightly faster than the Canadians.

So during the most recent six-year periods, U.S. health spending grew slightly more than Canadian health spending and then slightly less than Canadian health spending. Note that looking at the U.S.-Canada comparison through the lens of the last 12 years gives us a very different perspective. It looks more as though Canada and the United States are both countries that need to address health inflation. The deeper problem in the U.S., as Noah argues, is that the 1980s left us with a markedly higher level of expenditures, a higher base from which to grow. 

What happened in the 1980s? At that point, Canada’s single-payer system had been in place for some time, having launched in 1965. The U.S. Medicare system had also been in place since 1965. America’s Medicare system was, much like PPACA, a “coverage-first” measure. Peter Suderman recounts its history in the latest issue of Reason:

When Medicare, the federally run health care financing system for Americans who are 65 or older, passed in 1965, supporters knew the pro- gram would be expensive. Its lack of cost con- trols was the price of passage. Wilbur Cohen, a top health bureaucrat dubbed “The Man Who Built Medicare” by Medical World News, admitted that “the sponsors of Medicare, including myself, had to concede in 1965 that there would be no real controls over hospitals and physicians. I was required to promise before the final vote in the executive session of the House Ways and Means Committee that the federal agency would exercise no control.”

We’ll discuss Peter’s article at greater length once it has been published on the web, but this strikes me as a noteworthy and important fact about the trajectory of health spending in the United States.

Moreover, the Reagan administration introduced bureaucratic price setting into the system in the 1980s, which might also have had an impact. More on that to come. For now, it’s enough to observe that the growth of health care costs has been fairly high in both Canada and the United States, and that the real difference came in one decade of the 40-year period Ezra identifies.



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