The US is really rich, and we spend our riches on health care

Random Critical Analysis shows that high US health care spending is explained by its high standard of living. The story goes:

  1. Health care is a “superior good”. That is, it’s something that people spend a higher percentage of their income on as they get wealthier.
  2. GDP/capita generally correlates with wealth but the correlation is weak
  3. “Actual Individual Consumption” (AIC – measuring what people actually spend) is a much better metric for how wealthy the people in a country are
  4. When health care spending is compared to GDP at the national level, the US appears to spend way too much when compared to other nations
  5. However when you use AIC, the US level is perfectly in line with other nations
  6. AIC correlates with health care spending much better than does GDP

Graphically over the past 40 years it looks like this:

rcafdm_02_hce_pct_aic_by_aic_per_capita_1970_2013

The conclusion is that the US doesn’t spend too much – it’s just really rich and people are spending any money they can on their health.

It’s a compelling case. And it explains a lot about the health care market.

Essentially we see that people don’t want to spend less on health care. They want to spend more. Wanting to spend less on health care makes you a bad person.

And importantly, people think you’re really bad if you actually want human beings to use less healthcare. And in fact what he finds is that the extra money the US spends on health care (which again, is not out of line compared to its wealth) isn’t going to high prices. It’s mostly that we buy more health care services.

So we see that the only thing that restricts what a nation collectively spends on health care is what they can spend. They’ll buy as much health care as they can afford. And the US is very rich – far richer than you would get by looking at GDP. Based on how much its people consume, the US is 10-15% richer than the next richest countries, Luxembourg and Norway. And with nothing better to spend its money on, we spend it on health care.

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