The cost of health care: 1958 vs. 2012

Mark Perry has posted some interesting comparison of how prices have plummeted between 1958 and 2012 when measured in terms of the hours of work required to purchase items. He concludes that today's consumer working at the average wage of $19.19 would only have to work 26.6 hours (a little more than three days) to earn enough income ($511) to purchase a toaster, TV and iPod.  The equivalent products (in terms of their basic function, not their quality) would have required 4.64 weeks of work in 1958. In short, the "time cost" of these items has massively declined by 86% in less than 5 decades.

Similarly, Perry calculates that measured in the amount of time working at the average hourly wage to earn enough income to purchase a washer-dryer combination, the "time cost" of those two appliances together has fallen by 83%, from 181.8 hours in 1959 to only 31 hours today.

What if we applied this kind of analysis to health care? The results are quite interesting. In 1958, per capita health expenditures were $134. This may seem astonishingly small, but it actually includes everything, inclusive of care paid for by government or private health insurers. A worker earning the average wage in 1958 ($1.98) would have had to work 118 hours-nearly 15 days-to cover this expense. By 2012, per capita health spending had climbed to $8,953. At the average wage, a typical worker would have to work 467 hours-about 58 days.

In short, while time prices for other goods and services had shrunk to less than one quarter of their 1958 levels, time prices for health care had more than quadrupled!

 

Of course, health care in 2012 is vastly different and greatly improved compared to what was available in 1958. But the same can be said of other goods and services (Perry, for example, is comparing the cost of an iPod to 4-speed automatic record player).[1]

 This simple comparison reminds us of three basic truths. In general, private markets tend to produce steadily lower prices in real terms (e.g., in worker time costs) and steadily rising quality. This is exactly what we observe for goods such as toasters, TVs, iPods, washers and dryers. In contrast, while the quality of health care unequivocably has risen since 1958, real spending on health care has climbed dramatically. This isn't an apples-to-apples comparison insofar as the bundle of goods and services that constitute health care is also much larger today than in 1958. In contrast, even though the quality may be better, a washing machine in 2012 is still a washing machine.[2] If we were willing to rely more on markets in medicine, we might be able to harness the superior ability of Americans to find good value for the money to produce results more similar to other goods.

Second, over time, we as a nation have been able to afford more health care precisely because the time cost of other goods and services has declined. For the same number of hours worked, workers can enjoy the same standard of living even as they allocate more of their working time to purchasing health care. There is nothing wrong with this. The only issue is whether we are getting good value for the money when we buy health care. With only 11 cents of every health dollar paid directly out-of-pocket, I think most of us can honestly say "no."

Anyone who is skeptical on this point should do the following mental experiment: if I promised to pay 89 percent of the cost of your groceries, would what you buy be different? Most students I ask freely concede that they would buy things they would not otherwise buy and might well pay higher prices even for things they would have bought anyway. The difference between the cost of your weekly groceries when you buy them with your own money (say, $100) and what you spend when someone else is paying most of the bill (say, $150) is not pure waste. There is some added value to you from those extra groceries. But that value cannot exceed the added cost else you would have bought them on your own in the first place. The difference between that added cost and your own estimate of the added value is what an economist would call waste. According to the Institute of Medicine, we wasted about $765 billion in health care in 2009-about 30 percent of all spending.

Finally, this rate of increase is not sustainable. The time price of health spending cannot quadruple again over the next half century, else the average worker is likely to experience a decline in his or her real standard of living (i.e., what can be afforded after paying for health care). To paraphrase the former president of AEI, "we cannot make health care affordable by picking each other's pockets."[3] The sooner policymakers recognize this basic truth, the sooner we can get on a path towards sustainable growth in health care expenditures.

Update 1

Sarah Kliff had a nice follow-on piece in the Washington Post that elaborates on my chart and some possible explanations for why consumers are so much less cost conscious in health care.

Footnotes

[1] As well, one could argue that the average worker does not purchase the average per capita amount of health care since there are all sorts of cross-subsidies created by private and public insurance as well as U.S. tax policy. But at the end of the day, today's health spending is financed by today's workers, so if anything, the very rough picture I've provided is overly optimistic. On a per worker basis, total U.S. health spending this year will amount to $21,280, which would require an average-paid worker 1,108 hours of work to finance (and even more when taxes are taken into account). In reality, there are few U.S. workers who have to devote more than half a year to bankrolling their health care. The average hourly earnings figure I am using is only for production and nonsupervisory employees in manufacturing. Many other workers, including those in management and entrepreneurs, do not earn an hourly wage. And the costs of government-financed health care-which now accounts for more than 60 percent of health spending-tends to be borne more by those with the highest incomes.

[2] In fairness, when health economists have tried to measure the real prices of health treatments such as for heart attacks, they sometimes have found these have declined, though not nearly as rapidly as the decline in prices for goods and services analyzed by Perry.

[3] The original quote, from Christopher DeMuth, was "we cannot all grow wealthier by picking each other's pockets."

 

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Christopher J.
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