Where America's Health Spending Goes

By Greg McFarlane | February 17, 2012 AAA
Where America's Health Spending Goes

It's an article of faith across the political spectrum in the United States: health spending has accelerated out of control. What you hear less often is the inevitable corollary, that health spending thus ought to be curtailed. (Tell that to a parent whose child has cystic fibrosis.) What's rarely mentioned is that a) health spending is largely voluntary, b) the parts that aren't voluntary are often under the aegis of government agencies that have little incentive to cut costs and c) "health spending" is at best an ambiguous phrase. (For related reading, see Fighting The High Costs Of Healthcare.)

SEE: Estate Planning

How Much?
The New York Times cites a recent Organization for Economic Co-operation and Development (OECD) study which claims that in 2010, Americans spent about $8,000 per capita on healthcare. That's the highest figure listed among the several countries in the study, again with the implicit understanding that the number is somehow too high.

Is it? To draw a comparison, "education spending" is a category that many would argue is underfunded. Tell a typical man on the street that not enough money is being spent on education in this country, and chances are fairly good he'll agree with you. Yet, we're to believe the opposite applies regarding health spending. But isn't health a more fundamental necessity than education? After all, you can't learn when you can't function.

Swaziland wasn't one of the countries included in the OECD study, but it can illustrate a point: it's safe to assume that healthcare spending there is a tiny fraction of what it is in the U.S. Does that mean the Swazis have successfully "reined in" health spending? Far from it. With an abysmal average life expectancy of around 48 years, not to mention that around every 4th adult Swazi is believed to be HIV-positive, the conclusion seems to be that some nations' citizens could afford to spend more on health care. Much more.

But how much more? Or in the case of the U.S., how much less? Ask that same passerby (or a journalist) if health spending in the U.S. is too high and public perception presumes that he'd again answer "yes." Then ask him what a reasonable per capita number for health spending should be, if not $8,000. Make sure you check the box next to "blank stare."

How's It Figured?
There isn't a simple answer, and we've just proven that there's little correlation between dollars spent and benefit rendered. The aforementioned OECD study gives only slight details as to how it calculates its figures, breaking healthcare spending down into four categories: public health and administration, ambulatory, hospitals and nursing homes and pharmaceuticals. So if, say, a perfectly chipper American woman decides to purchase breast implants, she'd be adding to the totals for the 2nd, 3rd and 4th categories: she'll spend money on initial consultations, on the hospital stay for the surgery itself and on promethazine for any post-surgical pain.

And that kind of surgery is a multibillion-dollar industry in the U.S. The American Society for Aesthetic Plastic Surgery's own literature points out that such discretionary spending is increasing at 9%, annually – more than four times faster than the rate of increase in other health care costs. Still, poorer nations presumably have their laser skin resurfacing and chemical peel expenditures "under control." Only a nation that's already advanced past the rudiments of how to maintain health – with a clean water supply, dentists who recommend fluoride, etc. – can accommodate a market for unnecessary cosmetic surgery.

Insurance
That doesn't mean that the $8,000 per capita figure is necessarily a positive, either. Let's look at how much it costs to keep ourselves insured. Of course there's a tremendous variance among patients, from Olympic decathletes to TV documentary subjects who undergo bariatric surgery, but the average is worth noting. The Kaiser Family Foundation estimates that an employer-sponsored health insurance policy for a typical individual runs $5,429 a year. That's not even counting user deductibles. And that figure has doubled in the last decade. If an average citizen can pay that much (indirectly via an employer, but still) without ever setting foot in a hospital nor seeing a specialist, is there sufficient incentive to even get insurance? Or ever visit a doctor? (For additional reading, see 20 Ways To Save On Medical Bills.)

Expenditures
Studies and public perception notwithstanding, there isn't a generic "health spending" account that these dollars go toward, either. Do over-the-counter cough drops count as a health expenditure? The OECD doesn't give a conclusive answer. Emergency surgery for traumatic construction accidents neither does nor should fall into the same category as methadone for heroin users. Better we spend on the former than the latter, but better still if ironworkers don't balance themselves on I-beams hundreds of feet in the air in the first place.

American expenditure on health care follows, more or less, from the principle of limited government: that a nation's taxpayers should only collectively foot the bill for public goods whose benefit is enjoyed by society as a whole, and which private enterprise couldn't reasonably turn a profit on (e.g., roads and armed forces). Healthcare can obviously be provided by the private sector, as a look at any Health Maintenance Organization's balance sheet will tell you. Health itself necessarily differs from person to person – it's pretty much the one thing each of is individually most responsible for – thus making it the ultimate private good.

The Bottom Line
What about the results of that $8,000 per capita? What data would indicate a healthy population, i.e., money well spent? High life expectancy is just one bellwether, but the others are obvious –low obesity, average resting heart rate in the prescribed range, etc. That data is nigh impossible to collect in a nation of 300 million, and it wouldn't count the people who voluntarily reduce the nation's overall health. The same newspaper that cited the OECD study tacitly acknowledges that the money spent on drug and alcohol treatment in the U.S. reaches well into the billions of dollars, too. This would be filed under "voluntary." In a society of people who choose not to abuse drugs, spending on this particular subsection of health care would dwindle to nothing and, one hopes, give the OECD cause to rejoice.

While waiting for per capita health spending in the United States to reach whatever the optimal level is, it might be time to update the old aphorism: a penny of prevention is worth a dollar of cure. (To learn more, check out How To Avoid Medical Debt.)

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