17 November 2008

Health care costs are outpacing GDP ... So?

The Canadian Institute for Health Information released its study on health care spending last week, predicting spending for 2008 of $172-billion, or 10.7 per cent of our GDP. This represents an increase of 3.4 per cent over last year after inflation and population growth are taken into account. The predictable panic ensued.

The Globe headline announced "Record costs threaten Canada's picture of health," and Brian Day, past-president of the Canadian Medical Association fretted about the sustainability of the system. A little arithmetic can easily put Mr. Day's sustainability worry to rest. GDP is so large, a small increase simply overwhelms a large increase in health care spending. Assume, for example, that health spending continues to rise at 3.4 per cent a year. Assume further that the GDP rises at only 1.6 per cent (the average over the past three years after inflation and population growth are accounted for). Run the numbers out for 20 years. If your math matches mine, you will find that annual GDP will increase from the current $1,607-billion to $2,207-billion and health spending will rise to $336-billion, or 15.2 per cent of GDP. Sounds disturbing, but it isn't. In 2008, we will have $1.435-billion (1,607 - 172) to spend on other things. Twenty years from now, we will have $1,871-billion (2,207 - 336) to spend on other things, i.e. 30 per cent more than this year. Spending on health can grow very fast for a long time yet leave lots more money for buying cars, homes and whatever.

Much of the increased spending on health care results from better medicine. For example, at one time cataract surgery was dangerous. It resulted in up to a week in the hospital and vision was minimally improved. Today, it's an hour-long outpatient procedure that restores the patient's sight almost entirely. Naturally, many more people are having it done. Spending, therefore, increases, but the cost of surgery has actually dropped significantly. We should be careful to distinguish between costs and spending when we talk about health care. Advances in technology in any area tend to reduce costs and, as a result, expand markets, therefore increasing spending. This is generally considered a very good thing.

Improvements in medicine have also contributed to longer and healthier lives for all of us. This, too, adds to spending, but surely it is also a very good thing.

And the health care industry has more to offer than a thriving population. It provides many hi-tech, well-paid, highly-satisfying jobs. And it is a clean, smoke stack-free industry. Its prosperity and growth should be a matter of applause, and we can be assured that if the automobile or construction or computer industries were enjoying similar growth, the financial pages of the Globe would be saturated with applause.

So, when growth outpaces GDP in this very desirable industry, why do we encounter these furrowed brows? Why the panic? The answer isn't economic, it's political. Because we spend most of our health dollar collectively, as a community, rather than individually, because Medicare is redistributive, it runs afoul of the individualistic, small-government philosophy that still pervades North America. And then of course there are the rich and virtually guaranteed pickings that are withheld from private enterprisers.

Of course we should pay strict attention to improving efficiencies in the system, as we should with any system, and undoubtedly there are significant efficiencies to be gained. Our dollars must be treated with respect. That being said, so what if we spend 10.7 per cent of our GDP on our health care, or 12 per cent, or 15? What better way to spend our national wealth than on longer, healthier, more vigorous lives?

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