Economic Consequences of Health Care Reform

U.S. healthcare spending is $7,900/year/person., $2.4 trillion dollars or 17% of GDP. Big deal you say? What difference is there to the economy if consumers spend twice as much as other industrial nations on health care? That is the unanswered question of the health care debate, unanswered except in the sense of amorphous claims by those on either side of the issue.

The Democrats say a public option that succeeds in reducing healthcare costs will help the economy. Republicans seem to think reducing health care costs will hurt the economy, at least they are acting as if that is what they believe. As the opinions are diametric opposites, someone is not right, to a greater or lesser extent.

Kaiser Foundation publishes a straightforward summation of the growth of health care expenditures in the U.S.A. From their data, health care expenditures have risen from 5.2% of GDP in 1960 to 16% in 2005, current estimates are 17% in 2008. Some of that increase in cost must be attributed to advances in technology and technique, even in that, U.S. medical outcomes are not as good across the board as are outcomes in countries with "socialized medicine".

The same Kaiser document tells a tale of expenses that just does not make it into the press. The largest burden of health care is in treating the elderly, at 3.7 times the cost per person of every other age group. Medicare bears the brunt of that burden in care. With 2.9% of all income, deducted from all of employer and employee contributions and Social Security benefit payments, Medicare manages to absorb a nominal 80% of the medical expenses of recipients. Since personal income and consumption are essentially equal for the vast majority of Americans, at 70% of the economy, Medicare serves its beneficiaries with 2.9% of 70% of the GDP, or 2% of GDP. Then 15% of GDP is spent on healthcare for the non Medicare age population, 4.5 times as many people whose per person care costs are about a quarter of the cost for a senior citizen. In other words, we, as a nation, could be spending about 5% of GDP for health care if everyone was covered under Medicare. On the face of it then, 10% or so of GDP goes to profit, or waste if you prefer.

Now saving 10% of GDP is not likely a real achievable number. Much of that money is legitimately spent on new life saving technology and improved techniques. Returning to 1960 levels of technology is not likely to go down well with the public. But 10% of GDP is a nice round number, you can negotiate the deltas.

This 10% of GDP that goes to profit/waste should all be economically neutral except for where all the attendant profit ends up. A substantial amount of it, that which is passively invested by individuals who have profited or institutions which are husbanding gains, ends up being useless to the economy. How much is being drained off the economy by health care profits can only be estimated, but it is a certainty that it is part of the explosion of accumulated capital that is the most salient characteristic of the last thirty economic years.

M3 includes increasingly large sums that are fallow in regard to the economy, such as stock funds, hedge funds, commodity trading funds. M3 and M2 components have increased an order of magnitude in the last thirty years while M0 and M1 have just doubled. In other words there is more "money" in the world, by an order of magnitude, than circulates at any economic moment.

This is a hard concept to get across to people. The amount of personal and institutional wealth that is accumulated over and above what the economy needs to create new product or production capacity, is simply removed from the economy for practical purposes. And as an economy declines, the demand for useful employment of that capital declines. Excessive wealth is destructive to an economy for this reason, and tends to perpetuate the decline for which it is, in part, responsible.

Enormous profits in any industry are, ultimately destructive to the underlying economy, converting money that would otherwise be in circulation and powering economic growth, into dross. The only exception with health care is that the non-profit corporate organization operates under different constraints, having to appear to spend enormous cash flows. The one thing that makes it worthwhile for the principals in a non-profit is that there is no public accounting. Were there accounting, it would be very likely to reveal that non-profit providers operate on the old business budget saw, "use it or lose it".

So while it is a certainty that some economic benefit will come from breaking up the health care duopolies, what that benefit amounts to is impossible to calculate with certainty under current accountability practices. Really, honestly, the only way to figure that out exactly is for health care to open its books and to do an end to end accounting. An outsider estimate of what is sequestered out of the economy each year by means of the healthcare industry can be roughly estimated though.

The economy operates on turning over about 1.4-1.6 trillion dollars in money supply (M1) on a moment to moment basis. Out of this, M2 and M3 are built of the excess that is generated by the economy, the profit, the surplus cash. M2 and M3 are a clumsy and gross indication of personal and institutional profit. Over the last 30 years M2 has grown 6.5 trillion and M3 (M2 plus M3 traditional components, now privately estimated) has grown 13 trillion. Over the last 3 years, M2 has grown 2.5 trillion and M3 has grown nearly 5 trillion. M3 now equals the GDP. At current growth rates, M3 grows by an amount equal to GDP every 6 years or so. Put another way, M3 represents that there is enough capital in the U.S. to power the private investment rates of the GDP for 6.5 years without accumulation of any new capital.

Some portion of M3 must represent the profits from health care waste, and M3 is the only summary figure available from which to estimate how much of the 2.4 trillion spent on healthcare is NOT recycled into the economy through pay and capital re-investment. The following calculations then assume that health care is no more or less profitable than any American industry. It might be more so, or less so, profitable, but a rough estimate of economic impact can drawn.

If M3 is growing by 1/6th of the GDP every year and 10% of GDP spent on health care is wasted, then 10% of 1/6th of GDP ends up in M3 as a result of waste. To arrive at a figure representing an impact on the economy, 12-14 trillion in GDP divided by 6 = 2-2.3 trillion, the amount M3 is growing every year. Multiply that times the 10% of GDP that is health care waste, and 200-230 billion is taken out of the economy by excess health care spending every year. The economy could then be 200 billion divided by 12 trillion = 1.6% larger if healthcare dollars were not wasted. Not a lot, but a definite shot in the arm, no irony intended. No means exists to recover the 1.6% drain on the economy that rising healthcare costs and waste have been, but continuing to shrink the economy by 1.6% or more a year, as increasing health care cost then do, is a poor choice for the economy and is insidious.

Tax burdens will rise and fall based on health care costs more so than on any other issue other than defense. The question is whether or not government should facilitate continuing to shrink the economy by inaction in the realm of wasted health care dollars. So, do nothing about health care costs and taxes increase while the economy shrinks. Not a good proposition.