America’s health spending is squeezing everything
WASHINGTON — The idea that most middleclass Americans have been treading water economically is conventional wisdom. It is already playing a role in the 2020 campaign, as the Democratic presidential candidates propose policies — “Medicare for All,” free college tuition at state schools, subsidies for child care, to mention a few — intended to relieve the financial stress on millions of middle-income families.
But the conventional wisdom is wrong — or at least misleading. Although the squeeze is not a myth, it’s highly localized: uncontrolled medical spending. This is crowding out other spending, from wages to defense budgets. If we don’t stabilize health costs — and there is little sign that we will — we should expect the squeeze to continue indefinitely. Income inequality would also probably worsen.
We now have a new study from economist Richard Burkhauser of Cornell University that illuminates health care’s peculiar role. A standard benchmark of economic well-being is median income: It’s the earnings in the middle of any distribution of income figures. The higher the median, the better off people are assumed to be. In recent decades, the median income of U.S. households has grown slowly, stagnated or declined. In 2018, according to the Census Bureau, the median household income was $63,179; in 1999, it was $61,526.
But wait: The official figures don’t count health insurance, whether private or public — employer-paid insurance, Medicare and Medicaid federal health coverage for the poor and elderly.
To remedy this omission, Burkhauser and his collaborators, economists James Elwell and Kevin Corinth, estimated median income based on varying definitions. The simplest definition included labor income: wages, salaries, farm income and self-employment. Defined this way, and adjusted for inflation, median income has dropped 21% from 1970 to 2016. This explains why so many Americans feel squeezed.
However, that’s not the end of the story. A broader definition of income includes all labor income, interest and dividend payments, Social Security, other government transfers and — most important — the value of private and public health insurance. Under this definition, median income rose 68% from 1970 to 2016. By this definition — and reflecting the impact of health insurance — typical households have enjoyed a slow increase in living standards over nearly half a century.
Which definition of income to believe? Why, both of course.
We have the worst of both worlds. We don’t count health insurance as a form of earnings that would improve median income. People consider health spending separate and apart — something that is deliberately open-ended, because, as Sen. Bernie Sanders, I-Vt., repeatedly reminds us, it is a “right” to be exercised when needed.
There is something to this, because health spending is concentrated among a relatively small proportion of people. In 2016, the top 5% of patients accounted for half of all medical spending, according to data from the Kaiser Family Foundation. By contrast, the lowest 50% of spenders accounted for only 3% of total spending.
Sanders’ approach is self-defeating and ultimately undesirable. It makes us hostage to explosive health spending. We can’t control what we refuse to control. Almost any systematic effort to curb spending is subject to attack as cruel or immoral, despite the obvious reality that not all health spending is of the same value.
The result is that decisions are being made for us. In the early 1960s, before Medicare and Medicaid, which were enacted in 1965, health spending was about 2% of federal outlays. Now it is nearly one-third, at $1.3 trillion.
Corporations compound the pressures on take-home pay as frustrated companies shift more health costs back on their employees through higher premiums and deductibles. This, too, intensifies the middle-class “squeeze.” According to its 2019 survey of employer-provided insurance, the Kaiser Family Foundation reported that the annual cost of a family plan rose 5% to almost $21,000, with $6,000 in premiums paid by workers through withholding from their paychecks. Deductibles have also doubled over the past decade, to $1,655.
Total health spending is now about 18% of the economy (GDP), about twice the level of many advanced societies. Imagine what we could do if U.S. health spending had been held to, say, 12% of GDP. We’d have 6% of GDP, a sum equal to about $1.2 trillion, to spend on other things.
Government can’t cut health spending, so new spending reduces spending on other programs, raises taxes or bloats deficits. The effects are felt keenly by middle-income Americans and the poor, because the high cost of modern medicine consumes more of their incomes. We have created a monster, inspired by good intentions, that is slowly and menacingly taking charge of our future.