JLF head John Hood’s column early this week was on controlling health care spending, and on what the Right and Left should hopefully agree upon:
As societies mature and economies grow more sophisticated, it is entirely reasonable for the share of total economic output devoted to health spending to rise. Technological innovation and economies of scale, among other factors, allow people to satisfy their immediate needs for food, clothing, and shelter at a decreasing unit cost. That leaves them a growing share of their incomes to devote to other goods and particularly to services, including health care. This is just basic math: all subcategories of household spending (including savings to fund future spending) must all up to 100 percent of income in the long run.
So far, so good. But health care is not exempt from the law of diminishing marginal utility. Initial spending on clearly valuable medical services alleviates tremendous human suffering and death. As we continue to spend more on health care, however, the next increment of personal benefit tends to be smaller than the previous one. It is possible to spend a great deal of time and resources on medical care that doesn’t really save or improve lives much, either because the treatments had a low probability for success (think heroic efforts to save terminal patients) or because we spend many preventive-care dollars on people with a low probability of getting sick in the first place.
If resources were unlimited, it would be meaningless to speak of spending “too much” on health care — particularly since we would all reside in Heaven and have better things to speak about. Here on planet Earth, however, resources are inherently limited. To the extent that households, businesses, or governments spend ever-increasing sums on health care that doesn’t produce similarly increasing benefits, we can’t spend money on other goods and services that might make us safer, happier, and more productive.
Specifically, excessive spending on health care pushes up federal income and payroll taxes, which discourage private investment in new companies, employees, and capital goods. At the state level, excessive spending on health care via Medicaid and other programs displaces additional private investment via higher taxes while displacing greater public investment in assets such as roads and schools.
While we may continue to disagree about how best to discourage excessive health care spending, surely we can all agree that addressing the issue is critical to rejuvenating America’s economy and improving our quality of life.
