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Policy Hub: Macroblog provides concise commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues for a broad audience.

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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.