The Economics of Health Care is one of the areas of Economics that I find most interesting not only because some type of reform is exigent, but also because everyone interfaces with the health care system at some point in their life.

Some may not agree that reform is necessary, and that the system works fine just the way it is. However, I would suggest they do a bit of research before drawing such a conclusion. According to the Economic Report for the President (2009 http://www.gpoaccess.gov/eop/2009/2009_erp.pdf see CH 7), Americans spend about $8000 per person on health care per year. This is expected to grow rapidly as technology advances.

The chart below illustrates approximations of spending as a percent of gross domestic product (GDP) in the U.S., Canada, Japan, and France. Canada, France, and Japan all have universal health insurance—which one would think would be more expensive. As you can see, the U.S. spends the most as a percent of GDP, in 2000 it was around 13%-- now it is closer to 15% I believe.

Some would stop here and say—“okay—yes we spend more than other countries on health care, but we have the best health care in the world, so the extra expense is worth it.” Sadly, as with everything else in life, more is not always better. Our life expectancy is lower than the other countries in the above chart and out infant mortality rate is higher—two leading indicators of aggregate health status. So now it looks like we’re spending more, but not getting more—which, anyone can tell you—that’s not a good thing.

(This thought also assumes that you have health insurance as a means to battle health costs, which is not true for about 16% of Americans. More on this at a later date…) Economists call this phenomena diminishing returns—meaning that with each additional dollar invested in health care, at some point less health is received. It’s really best to illustrate this one with a handy graph. Part of the health care debate is really between the two (poorly drawn) icons below.

The question is: Are we on the star or the circle?

If we’re on the star, this means that as we spend more on health care we get a positive increase in our health status—a good thing! If we’re on the circle it means that as we spend more money on health care we don’t get an additional health from that spending (like trying to ride your bike to the grocery store, except your bike happens to be a stationary bike). Worse, if we’re at a point beyond the circle it means that as we spend more money on health care our health status actually gets worse—yikes.

Obviously we know there are big gains to some basic health care spending—immunizations, annual exams like paps, breast exams, prostate, etc. However, are there the same gains when a patient undergoes every MRI, X-Ray, and other expensive test necessary in the name of “just in case”? This is where people get divided because the answer to that question usually depends on whether or not anything useful results from the battery of tests. It probably isn’t worth it to give someone an MRI for a stress headache, but it is certainly worthwhile to give someone an MRI for a headache that is caused by a brain tumor.

This brings us to our first point of discussion in this series of things that contribute to the high cost of health care in the United States: Defensive Medicine.

Doctors are supposed to only run tests that they believe are likely to produce useful results. However, doctors often practice what is known as defensive medicine to protect themselves from expensive lawsuits. The JAMA noted that 90% of doctors say they have practiced defensive medicine—and who would blame them given the costs of a malpractice case—both financial costs, but also costs to his/her reputation.

Clearly defensive medicine raises medical costs as patients are subjected to more tests than are necessary. This is costly not only due to the money it costs patients, but takes time away from work/family, adds stress to the life of the patient undergoing the test, and adds to the crowding of hospitals with test equipment.

Sometimes the tests themselves can be lead to health problems for patients. More on all of this at KevinMD—a physician’s blog: http://www.kevinmd.com/blog/2007/04/defensive-medicine.html

What are some solutions to this? How do other countries get around the costs of defensive medicine? This is perhaps a topic for a future post, but what are your thoughts?