Why Rising Healthcare Spending Can Be A Good Thing

Human endeavor creates value. Healthier people endeavor more. Thus, health is a creator of value, of prosperity. The converse is also true. Wealthier societies demand more healthcare. When life is grand, people want to live longer and they want to maintain healthy bodies. Therefore, health and wealth form a virtuous, feed-forward cycle.

Growth in Total Health Expenditure Per Capita, U.S., and Selected Countries, 1970-2008  (source: Kaiser Family Foundation)

Empirically, the data supports this view. Let’s roughly assume GDP is a proxy for a society’s wealth. Longitudinally, as the GDP rises in any country over time, the percentage of GDP attributed to healthcare also goes up.

Cross-sectionally, when looking across different countries, increasing per capita healthcare consumption correlates with increasing GDP per capita.

It is no accident that the rise of China is being accompanied by a dramatic increase in healthcare consumption in the country.  It is also no accident that the United States, the leader of the free world, spends a higher percentage of GDP on healthcare than any other country.

Skeptics will report that many countries spend a fraction of what Americans do on healthcare yet report health quality measures that are on par with the U.S.  Overlooked is the fact that most innovative drugs and medical devices used by foreigners were invented by American companies.

Total Health Expenditure per Capita and GDP per Capita, the U.S., and Selected Countries, 2008 (source: Kaiser Family Foundation)

Americans as a society choose to reward the shareholders of medical innovator corporations, and those companies sell the same innovations at a fraction of the price to foreign countries.

In the same way that China and Mexico have been exporting labor deflation to the U.S., Americans have been exporting healthcare deflation to the rest of the world. It’s the kind of mutually beneficial arrangement that makes the world go around.

That’s not to say that the $2 trillion we spend on healthcare is wholly effective, or that it is fairly allocated. There are many areas in need of improvement. Many of these issues will be discussed in coming blog posts.

But to demonize, as we do, an industry that has transformed life on this planet in a handful of generations—the average human life expectancy has climbed steadily from 44 to 83 years since 1840—is not only looking a gift horse in the mouth but also criticizing its dentition.

It’s time to stop referring to the healthcare problem. It’s disease that’s the problem. Healthcare is the solution. Health is wealth.

Originally published on Forbes.com on October 18, 2012.