Health Care is the Growth Industry for the 21st Century

Published on May 13, 2009

Some researchers speculate that the decline in prevalence of chronic disease and disabilities will be enough to offset a rise in health care costs. Nobel laureate Robert Fogel disagrees.

Statistical evidence shows that despite increasing longevity and a delayed onset to chronic disease, health care costs continue to rise sharply at the end of people’s lives, said Fogel, Charles R. Walgreen Distinguished Service Professor of American Institutions.

Expenditures on health care, however, actually could be good for the economy, he said. Health care is a “leading sector, which means expenditures will pull forward an array of other industries, including manufacturing, education, financial services, communications, and construction.”

Fogel presented the sixth Professor B. Peter Pashigian Memorial Lecture May 13 at Harper Center. He based his lecture on his paper, “Forecasting the Cost of Health Care in 2040.”

Fogel displayed a graph showing how health care spending increases after age 50 and accelerates with each decade, with the most rapid acceleration occurring over age 80. “The financial per capita burden at age 85 and older is nearly six times as high as the burden at ages 50 through 54,” Fogel said. After age 85, costs rise even though the number of health conditions per person remains constant, he said, because severity of conditions increase.

Health care spending increases dramatically over the last two years of a person’s life. “Expenditures on persons during their last two years of life account for 40 percent of all Medicare health expenditures,” Fogel said.

The segment of the population over age 60 will continue to increase. That inevitability is but a “modest factor” in the burden of health services over the next several decades, Fogel said. The change in age structure will account for a rise in annual per capita consumption of health care from $3,800 in 1999 to $4,400 in 2040, an annual growth rate of 0.4 percent, he said.

A major factor will be the increased demand for health care. “As people get richer they want to spend a larger share of their income on health,” Fogel said.

In 1929 when the population was “much sicker” than today, Americans spent 3 percent of GDP on health care, compared to about 16 percent today, Fogel said.

Statistics showed that essentials like food, clothing, and shelter accounted for 74 percent of consumption in 1875 and had shrunk to 13 percent by 1995. Health care spending, however, grew from 1 percent in 1875 to 9 percent in 1995.

Elasticity of growth for health care measures 1.6, where “1” represents constancy. That means a projected rise for health care to about 29 percent of consumption by 2040, Fogel said.

Fogel said governments should not “seek to thwart” consumer demand for health care services. Resources to pay for health care will be released as percentage of consumption on such items as food, clothing, and shelter continue to decrease, he said. A recent National Bureau of Economic Research study “concluded that the benefits of health care services over the past 40 years more than justified their costs,” Fogel said. Public debate should shift from how to reduce health care costs to how to get the most out of health care spending, he said.

“Public policy should not be aimed at suppressing the demand for health care,” Fogel said. “Expenditures on health care are driven by demand, which is spurred by income and 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, health care is the growth industry for the 21st century.”

Pressure to suppress health care expenditures arises from the way governments and businesses provide insurance in rich countries, Fogel said. “It is of course necessary to provide medical care for those too poor to purchase it from their own resources,” Fogel said. In addition, policies should shift to private savings accounts for premium health care services at higher prices for those willing to buy it, he said. This would create “an effective way to relieve pressure on the finances of both businesses and governments,” he said.

Health care must be rationed in some way, he said. Otherwise, lonely elderly people might seek out health care just for company, as was the problem Kaiser Permanente ran into when it tried to develop a system with universal access.

In the United States, health care is rationed through costs. In Europe, it is rationed through queuing.

“A lot of the money we spend on health care, which is much more per capita, is to have a big enough establishment so that we can give it to you on time,” Fogel said. “The people who suffer the most in this queuing system are the elderly, because some of them are going to die before they have the procedure.”

                                                                                                                    — Mary Sue Penn