NEW YORK (Money Magazine) - Fourteen percent of America's gross national product is spent on healthcare. Let's take a close look at that number.
By any standard, it's a big, big number. In the early 1970s, that figure stood at less than 8 percent. That's what the United Kingdom spends now. In fact, among the 30 nations in the Organization for Economic Cooperation and Development, none come close to our rate of spending.
What do we get for our money? For a start, lots of technology. Though the U.S. has slightly fewer doctors per capita than the typical developed nation, we have almost twice as many MRI machines and perform vastly more angioplasties.
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We also get an extraordinarily rich health-care industry: Last year, for example, shareholders in the drugmaker Pfizer saw after-tax earnings of $9.2 billion, reflecting a net profit margin of 28 percent, while the firm provided some 50,000 jobs in the U.S. And all signs point to spending going up from here.
A trio of economists writing in the journal Health Affairs estimate that at least 31 percent of all the incremental income we'll earn between 1999 and 2010 will go to health care. Imagine getting a $3,000 raise and then finding out that your health-plan premium was going up $1,000. Come to think of it, given the 13 percent-plus insurance rate increases of 2002, that's not implausible at all.
We clearly can't afford to keep spending so much, right? Well, strictly speaking, as a nation we can. We're rich.
We don't just spend more on health than the Brits or Germans or Canadians, we also generally make higher salaries, live in nicer houses and splurge more on luxuries. Our 1970s counterparts would be just as amazed by our DVD players, 64-ounce Big Gulps and high-end organic food stores as by our drug-coated stents.
"The economic pie has grown enough to accommodate the big increase in [health] spending we've seen," says University of Michigan economist Richard Hirth, co-author of the Health Affairs study. "And it's still left us with the ability to increase our standard of living."
By his reckoning, if health spending grew one percentage point faster than GDP every year -- that's the rate the Centers for Medicare and Medicaid Services (CMS), the agency in charge of Medicare, projects for the long term -- by 2075 we'd be giving 38 percent of the economy over to medical costs. But we'd still have more to spend on everything else than we did in 2000.
Of course, the burden and the benefits of all this spending aren't spread around any more equally than our wealth is. If your boss has just decided that he can no longer afford insurance coverage, or if you are out of a job and can't meet COBRA payments, you don't really care about aggregate GDP growth -- rising health-care costs hurt you. Likewise, what the economy can handle isn't necessarily what government budgets can handle, as our Medicare story details.
But the point remains that as a nation we are spending more on health care largely because we can. You might believe some of that money should go to education or aircraft carriers or whatever. But since the early '70s, the life expectancy of an American newborn has climbed from 71 to 77, and our increased spending, especially on technology, deserves a lot of the credit.
A 2001 study by Harvard professor David Cutler and Mark McClellan, who is now the commissioner of the Food and Drug Administration, reports that from 1984 to 1998, spending on heart attack victims climbed by $10,000 per patient. But by 1998 the patients lived a year longer too. By assuming, as other economists have, that the value of an extra year of life, minus the cost of living in that year, is about $70,000, Cutler and McClellan argue that higher spending on cardiac care has paid off sevenfold.
Actually, I think I'd pay a lot more than 70 grand for that extra year. And I don't think I'm being selfish when I say that I wouldn't give that year up just to ease the fiscal strain on Medicare or to reduce MONEY's insurance costs.