U.S. Health Care and U.S. Productivity

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 several times what they claimed their foreign competitors spent. In her well-received book Who Killed Health Care?, Prof. 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.  Common sense indicates that richer countries will spend more on health care. In The Business of Health: The Role of Competition, Markets, and Regulation, 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 a recent research article of mine, 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 rate. 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. Obamacare’s backers emphasize America’s uniqueness in lacking government-controlled, “universal” health care. Given the benefits of America’s productivity, perhaps it is a uniqueness we should not rush to abandon.

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