In a famous 2010 Rolling Stone article, journalist Matt Taibbi characterized investment bank Goldman Sachs as a “great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.” The health sector is less assertive, but it also sucks blood out of the American economy.
Health-care spending in 2014 totaled $2.8 trillion, or nearly one in every five dollars spent of U.S. gross domestic product. Just under half of that total ($1.3 trillion) is spent by the federal government—and therefore ultimately by taxpayers. $1.5 trillion is spent by private entities, including about $1 trillion by insurance companies (ultimately by employers); $300 billion in household out of pocket spending; and $200 billion from other private sources.
In rough terms, the United States spends about twice as large a share of its economy on health care as the average of other developed nations. Health outcomes are not remotely twice as good. In fact, if a Martian examined the relationship between different nations’ health-care spending per capita and health outcomes they could reasonably infer that healthcare spending has negative productivity—higher spending seems to lead to worse health. Its pattern is similar to spending on K-12 education: states that spend more dollars per student often have poorer test scores.
Because of system dysfunctions discussed in Part III, health-care spending is like John Wanamaker’s view of spending on advertising: Half of it is wasted—but he wasn’t sure which half. Unquestionably, medicine and medical technology has lengthened many lives—average lifespans continue to climb by about a year every decade. But many countries which spend far less have longer lifespans and lower incidence of a variety of bellwether illnesses, including infant and child mortality, obesity, and heart disease. Compared to preindustrial times, undoubtedly health spending has been a lifegiver and a productivity enhancer. But this is far less obvious when America’s system is compared with other systems today.
Wasted health dollars have the same economic impact as any other waste: They divert scarce resources from productive to unproductive use. Defenders commonly point out that jobs are created in the unproductive sectors, too. What cannot be seen is the jobs uncreated because of the diversion of resources.
Resources devoted to sectors whose productivity grows quite slowly impose a particular burden on future prosperity. Health care suffers from one of the worst cases of what economist William Baumol termed “the cost disease of the service sector.” Many services, especially higher-skilled services such as medicine, are performed on an artisanal basis, one patient at a time. That limits the opportunities to achieve efficiencies through high volumes, as is common in many other industries. Unless consumers curtail their demand, services will absorb an ever-higher share of societal resources. Chapter 9 will argue that like university educations, health care has essentially unlimited demand.
Medical research does produce significant innovation, which has led to the happy result of longer lifespans. Some of those innovations even cut medical costs, such as pharmaceuticals that replace the need for expensive surgeries. But numerous scholars have identified as a persistent cost driver the adoption of expensive technologies to treat and keep alive patients who were previously beyond medicine. It is difficult to argue that health care has enhanced productivity—that is, has become productive faster than the economy-wide average.