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Will Health Costs Bankrupt America?

March 14, 2011

By Avik Roy

What kept going up even in the depths of the worst recession since the 1930s? Health spending.

What kept going up even in the depths of the worst recession since the 1930s? Health spending. It rose 4% in 2009 to an alltime record of 17.6% of gross domestic product. We are far above every other nation in health spending but don’t have the longevity to show for it. Health costs are by far the biggest threat to the nation’s fiscal health in the long run.

The Apothecary

Have you ever noticed that people don’t consider it a national crisis that the salaries of baseball players keep going up? Or the cost of movie tickets? Or college tuition? We fret about high health costs because the government controls half of U.S. health spending and therefore worry that rising health costs are going to fiscally sink the country.

What we talk about less is how that fact--that government drives irresponsible health care spending--is directly responsible for rising health costs. Think of it in the simplest terms possible: If there is fixed supply of a product and you subsidize demand for that product, the price for that product will go up. I know that a lot of people like to pretend that health care is somehow immune from the laws of economics, but it’s not.

Conventional wisdom says that new technologies are to blame for rising health costs. Well, why isn’t that true in any other sector of the economy? Are new technologies to blame for rising telecommunications costs? Are new technologies to blame for rising consumer electronics costs? If you’re scratching your head, you’re not alone.

The reason why new health care technologies are so expensive is because consumers aren’t involved in buying them. The typical American gets insurance either from his employer or from the government. In both cases the consumer is several times removed from the price and value of a particular health technology. He doesn’t pay for the product or service (his insurer does); and he doesn’t pay for his insurance (his employer or the taxpayer does). This allows everyone to game the system at someone else’s expense.

Put it this way. Let’s say we bought food the way we buy health care--through food insurance policies that other people buy on our behalf. The policy covers all monthly food expenditures over $100; the first $100 you would be responsible for yourself. In such a system, would you live off of ramen noodles for the rest of your life, or would you splurge at the fanciest restaurants you could find?

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