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How Much Should the US Spend on Healthcare?

February 5th, 2013

by Michael Edesess

We’ve all heard the scary projections about US health-care costs – particularly the soaring costs of the government programs Medicare and Medicaid. Typical of the alarm bells is an analysis by the Heritage Foundation showing that so-called entitlement costs (chiefly government health-care programs, but also Social Security) are projected to exceed 25% of gross domestic product (GDP) by 2085 and to exceed all tax revenues by 2045.

In a recent article in the Financial Times, President Obama’s former budget director Peter Orszag said, “Official projections show federal health expenditure rising between now and 2050 from 5.5 per cent of gross domestic product to more than 12 per cent.” Total US health-care costs, private and public, will be nearly a fifth of GDP by 2021.This situation, we are told, is unsustainable, calling for radical changes in health-care policy, especially government policy.

Before tackling those changes, two preliminary questions must be asked. How much of GDP should be devoted to healthcare? And how high should the government-provided safety net be? Only after those questions are answered can the issue of how to change government policy be addressed – if indeed it needs to be changed at all.

How much of GDP should healthcare be?

Consider the following chart:

Number of Chldren per Woman

The median age of women at marriage in the US was 20 in both 1950 and 1960. Fertility peaked at 3.8 children per woman in 1959, then fell to less than half that in the early 1970s.

A woman married in the 1950s was likely to have three or four children and to be occupied with childrearing for the next 25 years. Let’s hypothesize that women occupied with childrearing constituted more than 20% of the adult population under the age of 65 in the 1970s.

Assuming that all pre-retirement-age adults were equally capable of contributing to GDP, childrearing in the 1970s hypothetically consumed more than 20% of GDP – more than all healthcare is projected to consume in 2021. And the impact on GDP didn’t end there – women preoccupied with childrearing when they were young may have been deprived of the type of job experience that would have allowed them to contribute productively to GDP later.

Of course, childrearing was not monetized and included in GDP then, but the greater part of caring for the health needs of the aged is now. Much of the health-care costs being consumed now, and to be consumed in the coming years, are devoted to the aged – and administered to them by the cohort whom they reared in the 1950s, 60s and 70s.

Why, then, is it of such great concern that nearly as much of GDP is being consumed in healthcare for the elderly as was consumed in the rearing of their offspring 40 years ago?

It is important to think about it in this manner because it also makes you realize that you can’t extrapolate the trend too far into the future (careful analysts like the Congressional Budget Office do realize this, of course). The baby-boomers who are entering their highest health-care years will be followed by the baby-bust generation, which should relieve some of the pressure.

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