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Health care "costs"

This USA Today snapshot (via Washington Monthly) reminds me of a perennial bugbear -- the imprecise use of "costs," "prices," and "expenditure" when reporting on health care.

"Costs" often refer to how much is spent to produce something.

Prices are how much something exchanges for in the market.

If markets are competitive, and the goods and services being produced don't require very large fixed machinery or highly specific knowledge, and consumers know something about what they're buying, then prices and costs will be roughly equal.

See the problem? Health care does often require large fixed machinery or capital (hospitals and associated equipment), specialized training of labor (4 years college, 4 years medical school, 4 years residency anyone?), and patients/consumers don't know what ails and cures them as well as the doctors and nurses.

Expenditure typically refers to the total amount of money spent on something; that is it combines volume and price information.

As it happens prices, costs and expenditures for health care are all rising in the United States. What we hear most often are actually "health care spending" or "health care expenditure" numbers. In the press these are typically reported as "rising health care costs," even though some of the increase is driven by a people consuming more health care (in the aggregate).

This observation begs another question. If we are buying more health care despite rising prices within health care, what's happening to the price of health care relative to other goods? (The numbers are out there, but I'm writing this quickly ...)

(1) If health care prices are rising less quickly than the prices of other goods, then it's not hard to explain why we're spending relatively more on health care. It just looks cheaper compared to other things we could spend our money on.

(2) If health care prices are rising more quickly than other prices, but we're still buying more of it, this points to a couple of things.
(i)The first is that as incomes rise, people are choosing to allocate it in different ways. More simply, people would prefer to have a little extra health (however you measure that) than more possessions. This makes some sort of sense. In modern America you can buy an amazing and exhausting variety of goods to satisfy your desires, but there's a limit to how many goods you can take pleasure in. Trying to live a little better and longer might be more appealing than buying more furniture, or whatever ...
(ii) "Health care" is not the same product it used to be. Specifically, there are treatments available that never used to be. The availability of these choices makes people choose to spend their money on what we generically call "health care" when in the past they wouldn't have. For example, choosing to get mental health care now is a whole lot more enjoyable than it was in the 1950s ...
(iii) People are purchasing health care to offset the effects of other choices they have made. Specifically the choice to work long hours, to drive most everywhere rather than walk, and eat generally unhealthy food.

In short, spending 1/7 of the national income on health care, and rising, is not, in itself, a problem.

(and when I say people "choose" to work 10 hour days and drive everywhere I know that their choices are constrained by "social convention"/"oppressive managers" and the available transport options etc etc ...)

Posted by robe0419 at April 7, 2005 10:46 AM