Two Trillion Spent on Healthcare Each Year: A Sick Way to Prop Up an Ailing Economy

For the first four years after the dot-com bust in 2001, a weak economy in most sectors was masked by an explosion in real estate sales, rocketing home values and a surge of consumer spending as people taking advantage of super-low interest rates and easy credit grabbed chunks of equity out of their newly high-priced digs and went shopping.

In the summer of 2005, the New York Times reported that the real estate biz -- "everything from land surveyors to general contractors to loan officers" -- had added 700,000 jobs to the American economy during the previous four years, while the rest of the work force had lost 400,000 jobs over the same period. Technically the economy was in "recovery," when in fact most of it remained soft.

A few economists sounded a warning about having all our eggs in one economic basket. People like Yale's Robert Shiller and Dean Baker at the Center for Economic Policy and Research pointed out that home values weren't syncing up with the fundamentals of the market, and that we were headed for an "adjustment" -- either a real estate crash leading to a recession or, in the best case scenario, a "soft landing."

But while there were some voices of caution, other economists told us that everything was going gangbusters. This was the New Economy in action: American manufacturing may have been gutted during the previous few decades, but the service sector is where more "value" is added anyway -- where the big profits are -- and Americans would be just fine selling each other houses, insurance and the occasional cheeseburger until the Next Big Thing came along.

It was a hot debate, but something else was going on at the same time that got less attention: There was the emergence of what could be called the healthcare economy. As Michael Mandel wrote in Businessweek last September, "Without [the health sector], the nation's labor market would be in a deep coma." Between 2001 and 2006, 1.7 million new jobs were added in the healthcare sector. Meanwhile, the rest of the private sector added exactly zero new jobs (net) during that period.

(The conventional wisdom is that the economy needs to add about 150,000 jobs per month to keep up with the growth of the working-age population.)

If current trends continue, 30 percent to 40 percent of all new jobs created in the United States over the next 25 years will be in the healthcare business. Mandel argued that this trend is partly responsible for the United States' low overall unemployment rate. "Take away healthcare hiring in the U.S.," he wrote, "and quicker than you can say cardiac bypass, the U.S. unemployment rate would be 1 to 2 percentage points higher."

One could argue that this is precisely how a vibrant economy should work. A dynamic industry takes off and compensates for weaknesses in other sectors. When it cools, another field will explode, perhaps one we can't even conceive of today.

What's more, healthcare jobs have increased at the same time as we've shed millions of relatively high-paying manufacturing jobs. Wages in the health sector vary widely, but the average is slightly higher than the average income in the private sector as a whole. Healthcare is labor-intensive, so a lot of the more than $2 trillion we'll spend this year in the Unites States will end up in healthcare workers' pockets. It's also an industry in which offshoring and outsourcing are uncommon; you might be able to schedule your colonoscopy with a guy at a call center in Mumbai, but ultimately your ass has to be in the same country as the personnel who do it.

So, is a healthcare economy a bad thing?

It is, and for three reasons in particular. The most obvious is that these jobs are coming at a cost that the United States can't continue to pay without facing severe consequences (especially as the baby boomers get into their Golden Years). According to government data (PDF), healthcare costs exploded between 2000 and 2005 -- increasing by a whopping 47 percent. Over a longer period, from 1995 to 2005, per capita healthcare spending increased by 77 percent. That's slowed a bit, but not by much; total costs are projected to reach $2.25 trillion dollars this year, up 14 percent just since 2005.

That kind of growth outpaces the overall growth in the economy by a mile -- the share of America's total economic output being sucked into healthcare has increased from just under 14 percent in 2000 to over 16 percent this year, and is expected to equal one fifth of the total economy in 10 years.

Those costs put the squeeze on millions of American families. A study by the Commonwealth fund found that families' out-of-pocket expenses (and premium copayments) rose in direct proportion to overall healthcare spending. With wages stagnating, that's leading to real pain; almost half of those declaring bankruptcy in 2001 cited healthcare costs as a "major contributor." An ABC News/USA Today Poll found that one in four Americans questioned said that their family had had a problem paying for medical care during the past year, up 7 percentage points over the past nine years.

It may also have an indirect impact on wages, which have remained stagnant for most of the working population since 2001. Right-wing economists like Greg Mankiw, the former chairman of Bush's Council of Economic Advisors, who infamously suggested that assembling cheeseburgers at a Stuckies should count as a manufacturing job, argue that looking at wages isn't an honest measure of how workers are doing, because their overall compensation -- including medical and other benefits -- has risen faster than inflation, while wages haven't. Allan Hubbard, another Bush economic advisor, told the Wall Street Journal that "employers are spending more money on healthcare, and that's robbing people of wage increases." The claim is controversial -- corporate profits and executive pay have both increased at the same time, and fewer than half of all American workers get coverage from their employer -- but it is a simple fact that the gap between the cash working Americans are pocketing and the money their employers pay for an hour of their time has been growing. According to a study by the Kaiser Foundation (PDF), workers' pay rose by 18 percent between 2000 and 2006 -- not quite keeping up with the 20 percent total inflation -- but employers' healthcare premiums rose by almost 90 percent.

That last number gets to the heart of the second problem, one that Big Business is becoming increasingly aware of: Those costs are much higher than in other countries and, unlike every other advanced economy in the world, much of the burden is born by U.S. companies instead of being spread across society through a progressive tax system. That puts them at a distinct disadvantage in terms of labor costs, and encourages U.S. firms to offshore and outsource as many jobs as possible. So while the healthcare industry is adding jobs, the spiraling costs create a powerful incentive for other sectors to shed them.

Lastly, and most importantly, we're talking about investing an enormous chunk of our national income into a healthcare system that offers the lowest imaginable value for the dollar. In 2004, we spent $6,102 per American on healthcare. Not only did that figure lead the world, it did so by a huge margin -- No. 2, Switzerland, came in at just over $4,000 per person, two grand less than the United States. For that money, we rank between 15th to 37th out of 153 countries studied by the American Society of Integrative Medicine in every single measure of health outcomes. The authors note that "almost every major study of America's healthcare system has concluded that we could hardly do worse in terms of how much well-being is yielded for the resources currently expended." We're paying for a Ferrari, and we're driving a Pinto.

There are many reasons these costs are so bloated, and some are subject to fierce debate. But what is arguably the biggest problem is also one of the least discussed: The fact that the whole system is set up with perverse and essentially self-defeating incentives. America's healthcare economy is actually a sickness economy, where all the emphasis is on treating people once they've gotten sick, instead of keeping people healthy in the first place. It is reactive rather than proactive, despite a large body of research that proves the old adage that an ounce of prevention is worth a pound of cure. Studies show that a dollar spent on preventive health will save up to four dollars by the fourth year that the data are tracked ($$). But while public health experts preach prevention, only about one percent -- a penny on the American healthcare dollar -- goes to actual prevention programs (depending on how you add it up, that figure may be as high as ten percent, which is still far below what other advanced countries spend on prevention).

And we're also paying a steep penalty -- all of us -- for our system's lack of universality. Studies show that people without coverage often put off medical care until the symptoms are so bad that they end up in an emergency room, where they ran up about $65 billion in charges in 2005. According to a study by the advocacy group FamiliesUSA, they pay a bit more than a third of the costs out-of-pocket, the government picks up a third of the remainder and the rest is paid by people with health coverage through higher premiums. According to the FamiliesUSA study, that adds up to almost $1,000 per fully insured family.

That's where we are: With $600 billion per year picked up by the government, our healthcare system, while a rip-off by any reasonable measure -- is becoming a fabulously expensive jobs program. The idea of the government shelling out big bucks to stimulate growth in the number of decent jobs is passé among policy makers, but we do it year in and year out in the healthcare economy. There are other sectors that, with proper government encouragement, could use that kind of stimulus -- things like renewable energy, rail and public infrastructure.

We need a healthcare system that's about caring for people's health, not a healthcare economy that is more effective at making an uncertain economy look strong than it is at keeping us well.