Forecasting the Cost of U.S. Healthcare

Robert Fogel has a very well-written, well thought-out piece in The American on the topic of Forecasting the Cost of U.S. Healthcare. The article breaks down the forces affecting the future cost of medicine into five categories. The section below list each category which Dr. Fogel’s arguments and my comments mixed in.

1. A likely continued downward trend in age-specific prevalence rates of chronic diseases and disabilities. According to the article “First, there is now convincing evidence that prevalence rates of chronic diseases declined during the 20th century. Second, the rate of decline in these prevalence rates has accelerated. In the American case, prevalence rates declined at a rate of about 1.0 percent per annum between 1910 and 1980. Between the early 1980s and 1989, they declined at about 1.2 percent per annum.” Most importantly, Fogel comments on how the disease burden will shift. As life expectancy increases, will cost burdens be similar but simple shifted later in life? Will healthcare utilization decrease at every age? How change in life expectancy affect health care utilization is difficult to predict.
2. The rate of change in the cost of treating these conditions. For me, this is the main cost driver. Technological change will improve the quality, but also increase the cost of treating each disease.
3. The increase in the number and proportion of the population that is elderly. Fogel claims that this will have a small affect on rising health spending, “on the order of 10 percent.”
4. Changes in the overall U.S. population. Changes in overall population will affect total spending levels; if the U.S. population doubles and nothing else changes, it is likely that GDP and health spending will double. Thus, population growth will affect nominal medical spending, but should have a small affect on per-capita medical expenses.
5. The rate of growth of per capita income. When a society gets richer, it can afford more things. One major item that societies tend to purchase more of is health care. How heathcare expenditures evolve alongside economic growth is captured in the concept of income elasticity (i.e., by what percentage will I increase spending if my income goes up by 10%?). Fogel claims that income elasticity for medical care is 1.6 (i.e., society will spend 16% more on health care when its income goes up by 10%). According to Borger et al. (2008), empirical income elasticity estimates range between 0 and 1.6. Thus, Fogel choose a figure on the high end. However, most empiricial estimates of income elasticity are above one, meaning that the share of GDP dedicated to health expenditures will increase as society gets richer.

Overall, Fogel claims that because income elasticity is high, one need not worry about rising health care costs. “Consequently, there is no need to suppress the demand for healthcare. Expenditures on healthcare are driven by demand, which is spurred by income and by advances in biotechnology that make health interventions increasingly effective.”

On the other hand, it is important that this money is used wisely. Sick patients who want a miracle will pay nearly any price for treatment. If the doctor offers a fancy, high-tech treatment at twice the cost of an equally effective basic treatment, the patient may decide to go for the high-tech apparatus. The thinking is, it’s my life and I want the best technology available. However, if this high-cost high-tech equipment was not made available as a choice–again, assuming it was not better than the basic treatment–I would guess that the patient would be perfectly happy with the effective basic treatment. This is the phenomenon of supplier-induced demand that Fogel ignores.

The Healthcare Economist’s Take: Increased medical spending is not a problem in and of itself as long as those additional dollars are going towards productive, cost-effective treatment.