Thursday, September 3, 2009

Fogel Forecasting The Cost Of Healthcare

An excellent article, "Forecasting the Cost of U.S. Healthcare" by Robert Fogel, winner of the Nobel Prize in Economics in 1993 and economics professor at the University of Chicago Booth School of Business. It is one of the best articles on the underlying drivers of healthcare costs and spending. (HT: Arnold Kling).

Fogel's conclusion:
Consequently, there is no need to suppress the demand for healthcare. Expenditures on healthcare are driven by demand, which is spurred by income and by 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, healthcare is the growth industry of the 21st century. It is a leading sector, which means that expenditures on healthcare will pull forward a wide array of other industries including manufacturing, education, financial services, communications, and construction.
From a broader business perspective, the logical conclusion is that employees are willing to accept lower wages for better healthcare benefits. Therefore, healthcare is neither a unique employer cost concern nor a company competitive disadvantage.

From the US government's perspective, Medicare is still a funding problem for the federal government. Since longevity is increasing, as is the proportion of the elderly, and most medical costs are in the last few years of life, Medicare will see increases in its share of the costs. While the data shows a 1.6 income demand elasticity, i.e. for every 1 percent increase in income, there is a 1.6 percent increase in medical expenditures, there is no reason to believe that Americans are willing to see their taxes increase to cover the increasing Medicare costs.

Additionally, the median income of the 65+ age group is less than 60 percent of all households' median income (65+: $27,798 , All HH: $48,201, US Census Bureau, 2006 data). Therefore, there is the need for taxpayers to continue to subsidize the medical costs of seniors, including cost increases, either through the current Medicare program or through some other government benefit or income transfer program.

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