Tuesday, September 15, 2009

Nobel Laureate Economist: "There is no need to suppress the demand for healthcare"

The University of Chicago's Robert Fogel won the Nobel Prize for Economics in 1993. In this piece, published in The American, the magazine of the American Enterprise Institute, Fogel argues that health care is a superior good, and so the percentage of our income that we spend on health care has been rising for centuries. As he sums it up, "For every 1 percent increase in a family’s income, the family wants to increase its expenditures on healthcare by 1.6 percent." Is this a good thing or a bad thing? People can argue, but Fogel thinks it's a good thing:

Consequently, there is no need to suppress the demand for healthcare. Expenditures on healthcare are driven by demand, which is spurred by income and by advances in biotechnology that make health interventions increasingly effective. Just as electricity and manufacturing were the industries that stimulated the growth of the rest of the economy at the beginning of the 20th century, healthcare is the growth industry of the 21st century. It is a leading sector, which means that expenditures on healthcare will pull forward a wide array of other industries including manufacturing, education, financial services, communications, and construction.

This is an important point to dwell on, because the conventional wisdom holds just the opposite--that we are spending too much, that we must cut back. But Fogel's point isn't just that spending on health care is justified because people want it, his further point is that the demand for health care is an economic driver for the entire economy. That is, the desire to be healthy--more precisely, the desire to consume goods and services that make us healthier--is something to be treasured, for the sake of the overall general welfare.

That's Fogel's view, and it's also the view of another Nobel Prize-winning economist, Kenneth Arrow, expressed to The Atlantic Monthly in July.

But in the meantime, the conventional wisdom is thick upon us. For example, Katherine Hobson, writing in US News this summer, had this to say about health care technology, and thus expenditures:

Americans adore technology. We love our iPods, our Kindles, our TiVos, our Xboxes, and our smartphones. So it's no surprise that our high-tech infatuation extends to our medical system, where we zap prostate cancer in multimillion-dollar proton-beam therapy centers, implant defibrillators in chests to shock hearts back to life, use robots to perform surgery, and take detailed pictures of every part of our bodies using constantly advancing imaging technology.

The trouble is, we really can't afford it. Experts say that spending on new health technology—not just fancy machines but also drugs, devices, and procedures—makes up as much as two thirds of the more than 6 percent annual increase in healthcare costs (this year's costs: $2.5 trillion). "It's one of the key reasons why U.S. healthcare is so expensive," says Winifred Hayes, founder and CEO of Hayes Inc., a health technology research and consulting firm. The problem isn't usually the technology itself but rather its use in certain patients where it hasn't been shown to help more than cheaper options do—or at all.

Such criticism of healthcare expenditures is common, of course, but it's ironic coming from US News, which published her critique in the August 2009 issue, which bannered, "America's Best Hospitals: How new technology is transforming medical care." That is, the whole reason that US News put out that particular issue was to trumpet health care issues--and the only reason anybody bought that particular issue. Which is to say, the mere existence of that issue of the magazine is testimony to the economic driving power of health care.

Which proves Fogel's point.


  1. I work for a Medicare Part B Contract with over 20 years experience in the field. I have often spoken to senior groups explaining the program. Remember the Medicare Catastrophic Coverage Act of 1988 (which was really a great reform)? In many times explaining the benefits of that act to people, I used an analogy from my observation of the beneficiaries of healthcare services in the US. People in the US want the very best of healthcare regardless of the cost, regardless of the necessity! For example, most of us have a myriad of choices for automobile transportation. You can purchase a Ford or a Ferrari. Both do exactly the same thing - provide transportation from one place to the other. For a cost, the Ferrari (and many other vehicles in between the two) do other things, in other ways, but basically it too gets you from one place to the other. In healthcare, an X-Ray (for example) and an MRI do the same thing; get you to a diagnosis. But, most people don't want the X-ray, they want the MRI, which is a much greater cost whereas the X-Ray may have gotten you to a proper diagnosis without the added cost. In short, beneficiaries want the Ferrari of healthcare regardless of the cost.

  2. You wrote: "Fogel's point isn't just that spending on health care is justified because 'people want it' ."

    I like what you wrote about Fogel, but I think his assumption that 'people want it' may be off of the mark and not the root cause.

    I offer that the Doctor wants it because of the need for a 'documented' future and possible malpractice defense, OR to keep the patient happy if they ask for it (ex. 'yes Johnny dear you can have 4 scoops of ice cream), then they wont sue me, OR their buddy owns the MRI & the doctor gets free vacations.

  3. The comments here don't seem to comport with reality as I've experienced it, from a patient's point of view. Over the past thirty years or so I've had several health challenges, from MS to brain tumor (benign), to several fractures (secondary to MS). In each circumstance I've used the medical facility that was available to me and followed the treatment modality that was recommended to me by my doctors. I don't know if I was a typical patient or if I was overly compliant and passive but it never occurred to me to "shop around" for medical treatment or demand or even request a particular technology be used for my case. I now that nowadays hospitals advertise themselves on the basis of of the fancy gadgets they offer, but if I'm at all the typical patient, we're grateful if we get a competent, skilled treatment team, and we shop, if at all, based on reputation. We're also grateful if the hospital kitchen serves fresh fruits and vegetables.

    peter913's comment might be a cynical reflection of his own experience (perhaps). Maybe he knows something I don't know. I will cheerfully acknowledge naivete if you show me the facts.