The Atlanta Fed's macroblog provides commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues.

Authors for macroblog are Dave Altig, John Robertson, and other Atlanta Fed economists and researchers.

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January 22, 2006

We Are Richer, Therefore We Spend (On Health Care)

Angry Bear apparently never sleeps, and to prove it Kash Mansori has an interesting post on medical care spending (posted at 4:15 AM Saturday morning!).  A few highlights:

It should come as no surprise to anyone that, partly as a result of a persistently higher-than-average rate of inflation in medical care, consumers have been spending a larger and larger fraction of their income on medical care...

... [Bureau of Economic Analysis] data attributes much of this increase in health care's budget share to an increase in real medical care spending, not to inflation. In other words, the rapid advances in health care spending during the 2000s are largely due to the fact that individuals are consuming more health care, according to the BEA...

A few weeks ago I suggested that higher spending may be associated with declines in the effective cost of medical care, by which I mean costs inclusive of factors such as pain, probability of complications, and recovery time.  Implicitly I was suggesting that we overestimate the price of medical services, a possibility Kash notes in his post.

Economists Charles Jones and Robert Hall have another explanation: Rising shares of expenditure on medical care is the natural outcome of becoming ever wealthier.  From their abstract:

  Health care extends life. Over the past half century, Americans spent   a rising share of total economic resources on health and enjoyed   substantially longer lives as a result. Debate on health policy often   focuses on limiting the growth of health spending. We investigate an   issue central to this debate: Is the growth of health spending the   rational response to changing economic conditions---notably the growth   of income per person? We develop a model based on standard economic   assumptions and argue that this is indeed the case. Standard   preferences---of the kind used widely in economics to study   consumption, asset pricing, and labor supply---imply that health   spending is a superior good with an income elasticity well above one.... In   projections based on the quantitative analysis of our model, the   optimal health share of spending seems likely to exceed 30 percent by   the middle of the century.

Kash has it just right when he says

... what is underlying dramatic change in medical care spending of the past few years. .. [is clearly] an important question, because it plays a crucial role in understanding whether the rapid rise in people's spending on health care in recent years is a good thing or bad.

As of now, I'm in the good thing camp.

January 22, 2006 in Health Care | Permalink


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That begs the question of why isn't there more out there that we value enough to invest in and spend on.

Posted by: Lord | January 23, 2006 at 01:16 PM

If health care has an income elasticity greater than one, all this talk about spending too much on health care strikes me as misdirected. Of course, the fact that income distribution is getting more skewed over time raises some interesting distributional issues. But even Milton Friedman would argue that the U.S. health care market is inefficient. Inefficiency can exist even when the share of income accruing to the product is low - whereas an efficient market could command a large portion of one expenditure if that product is in high demand, which is your point.

Posted by: pgl | January 23, 2006 at 05:42 PM

Lord -- Agreed, but that wasn't really the question I was thinking about.

pgl -- Agreed as well. In my couple of posts on this topic I haven't meant to imply the absence of things to fix regarding how health care is delivered in this country. But I do think this notion of rising expneditures related to both price and income elasticity captures a very significant element of truth. Would we both agree that the big goal is allocative efficiency, not expenditure reduction?

Posted by: Dave Altig | January 24, 2006 at 09:33 AM

David - agreed. Also check out the latest from Arnold Kling, which was so brilliant (or was that humorous) that I had to post on it. Short version - health care has to be a Giffin good to accept the White House logic for its own proposal.

Posted by: pgl | January 25, 2006 at 07:44 PM

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