Excellent analysis

Random Critical Analysis (RCA) is a very clever analyst of unknown name. I have run across his work intermittently and almost always, regardless of field, his analytical approach is sound and revealing. I have always been impressed.

He now has a new primer out on healthcare which is rather stunning in its quality, comprehensiveness, and the variety of issues it addresses as part of the larger conversation as to what is it that drives national health spending.

One of the evergreen criticisms of the US health system is that we spend a lot more (too much) compared to other wealthy nations. Even as far back as my college days, this has been a suspect measure for condemnation. We do spend much more than most of our OECD colleagues. However, we have a radically different system answering quite variant needs.

My response to glib critics was that when you looked at health spending adjusted for income, the US came out much better than the critics acknowledged. Basically, if you are a rich nation above some basic minimum, health spending is discretionary spending heavily influenced by demand elasticity. The richer you are the more likely you are to spend a disproportionate amount on health.

If you are securely rich, you have a strong motive to remain well and rich. A motive which translates into raw spending.

One of the measures of income which I used was GDP. Excusable in the early 1980s. But we have better, more sophisticated data today which RCA uses to make the argument even more robust.

Practically all informed people recognize income is a particularly strong determinant of national health spending. Many of these same people also argue the US spends too much using Gross Domestic Product (GDP) as their preferred income measure.

The problem is GDP is not even particularly a good proxy for the income of households (individuals). GDP is designed to measure how much value add is produced within domestic (territorial) boundaries. It usually does a fairly decent job of this, but it does not directly tell us about the household perspective, as in, the average level of real incomes or real consumption enjoyed residents of a country (a.k.a. “material living conditions“). Most importantly, it is an increasingly unreliable proxy for this concept.

My position is national health spending is overwhelmingly determined by the average real incomes of countries’ residents in the long run (differences in propensity to consume may have a small role to play). The elasticity of national health spending with respect to reasonable measures of income or consumption is exceptionally high, averaging around 1.6 in OECD panel data, meaning that a 1% increase in income is expected to increase health spending 1.6% at a national level. Americans are exceptionally rich by these same measures, so it is hardly surprising we spend a tremendous amount on health care — far more than would be implied by simple regressions with GDP and far more than most people appreciate.

I first made this argument with Actual Individual Consumption (AIC) because it is a good indicator of material living standards and because that data was more readily available at the time. AIC is a comprehensive measure of household consumption that is adjusted for government transfers in-kind (e.g., health, education, etc.). Unlike earlier measures of household consumption (e.g., household final consumption) found in National Accounts, it does not systematically under-estimate the material welfare of social democracies where in-kind transfers constitute a substantially larger fraction of comprehensive household consumption or disposable income.

I agree. Actual Individual Consumption (AIC) is a much better measure of personal well-being in a national economy than GDP. A distinction relevant in other topics as well beyond just health spending. For example, income inequality in the US is much lower when you use AIC rather than per capita GDP. You can argue that it still might be too high but you are going to have a better argument and with different root causes when you use better measures.

The correlation of AIC to health spending is much higher than GDP to health spending. It is a better measure.

But choice of measurement is the tip of the iceberg. RCA dives deep and covers a lot of issues. And I broadly agree with much/most of what he has written.

I am not a health economist. But I do have my degree in International Economic Development. I do have a heavily analytical career in management consulting. I have lived in seven different countries on five continents. I have lived on a multi-year basis with and had experience of the healthcare systems of the US, Britain, Sweden, and Australia. I have passing familiarity with others.

One of the things I think most Americans have difficulty comprehending is just how much wealthier they are than virtually every other country in the world. When you use AIC or a similar measure, Adjusted Household Disposable Income (AHDI), the results are striking. In real terms, the bottom quintile of American AID/AHDI are in the mid- or upper-quintile for most other nations. Our poorest citizens have a purchasing pattern comparable to a middle-class German, for example.

Beyond that, every country makes different trade-offs. For decades, the British National Health Service had draconian cost controls. As a consumer, you had zero out of pocket costs, but you might not get treatment at all or only after a long waiting line.

In Australia, my comparison for Australian friends was that if you had an ordinary health condition, you would definitely want to be in Australia. Cough, broken leg, kidney stone. At that time, doctors still did house calls. The whole system was pretty easy to use and accessible. As long as you were within the 60% standard deviation of conditions. If you had anything exotic or unusual or uncommon, it either could/would not be treated at all or only under the most exceptional of circumstances. Heart failure with liver disease - you better be in the US if you want the prospect of any desirable prognosis.

RCA gets into a lot of this. His overall point is that much of American health spending is driven by our prosperity and the only prospect of reducing those expenditures is the kind of draconian cost control which is so unpopular. And increasingly uncommon. Even the UK which used to do such a good comparative job of controlling costs by controlling availability of service has fallen into the practice of always saying yes to more and more expensive procedures.

If you honestly believe the rise of healthcare is mostly about prices and that attacking volume is dangerous, as Bivens implies, you are almost certainly wrong, and you are unprepared to address cost containment.

Curtailing volume is the only thing likely to make a significant difference in the “cost curve” in the long run. A price reduction is at best a one-shot deal and far harder to achieve than many seem to believe. I certainly agree that constructing policy to target health spending (volume) is extremely difficult to sustain politically, but it’s the only way to fundamentally alter the trajectory in the long run.

Viewed strictly from the perspective of cost containment, the most successful cost containment regime in the OECD was probably the UK (NHS), which was perhaps an accident of history. They rationed particularly aggressively and managed to hold costs substantially below what we would expect for a country of its wealth for a few more years than usual.

However, people (voters) ultimately wouldn’t stand for it, so this rationing effort was radically reduced (budgets expanded). Today they are much closer to expected spending levels today, and I suspect they will further converge on the trend observed in the US and most other developed countries (while the NHS itself is still notionally popular, people are still complaining about cuts despite the massive increase in spending!)

I won't belabor the point. It is not that there are clear solutions.

RCA illustrates that there is a fundamental connection between prosperity and disposition to spend on health and that is true for all systems. National health systems are just as prone to this as others. The existing differences in health spending in absolute dollars are not a reflection of differences in efficiency and effectiveness, they reflect differences in real AIC.

There is more reality and meticulous analysis and real consideration of likely outcomes in this single long-read essay than in just about the entirety of the multiyear Obamacare debate and debacle.

Statists and technocrats want the solution to be one of process efficiency and effectiveness. However, national health systems (of whatever type) are too complex and unstable for that centralized deterministic engineering approach and statists don't do emergent order, systems thinking, and incentive structures very well. Spending will correlate with prosperity and the effectiveness of the spending will be variable as well. If you have a culturally homogenous population with constrained freedom of decision making, you will get one outcome. If you have a heterogeneous population with broad freedom of decision-making, you will get a radically different one.

The choice is not really about how much gets spent. The choice is about who chooses and how rich they are (individually and as a nation.)