Why Is Health Care Spend Worse Than iPod Spend?

What makes health care spending particularly "bad?" I mean, we're trying to limit our health care spend as a country, but why would health care spend be any less of a productive use of money than say buying an iPod?

Harvard economist Greg Mankiw today juxtaposed a statement by Barack Obama forewarning that health care costs could rise to 30% within 30 years with a study that showed that optimal health care spending was over 30% of a peron's income:

Economists Robert Hall and Chad Jones, writing in the QJE a couple years ago:

Over the past half century, Americans spent a rising share of total economic resources on health and enjoyed substantially longer lives as a result. Debate on health policy often focuses on limiting the growth of health spending. We investigate an issue central to this debate: Is the growth of health spending a rational response to changing economic conditions—notably the growth of income per person? We develop a model based on standard economic assumptions and argue that this is indeed the case. Standard preferences—of the kind used widely in economics to study consumption, asset pricing, and labor supply—imply that health spending is a superior good with an income elasticity well above one... In projections based on the quantitative analysis of our model, the optimal health share of spending seems likely to exceed 30 percent by the middle of the century.

Amazing what economic models can show you. What makes health care spend a "bad" cost to me though is that it's too often an unmanageable financial burden, namely for:

1. Government. The major driver of our budget deficit is an exponential rise in health care spend. The government will go bankrupt unless it lowers costs and/or cut back coverage.
2. Individuals. According to the Center of Economic Advisers, about 17% of individual bankruptcies result from catastrophic health care expenses. The "rational consumer" who "smooths consumption" doesn't plan for those outlier events of severe injuries and illness. Extending life may be worth the financial burden, but it too often bankrupts a person.

The Center of Economic Advisers report other positive externalities from health care reform, such as higher GDP , lower unemployment, and more discretionary spending for families.

Health care spend, in itself, is not inherently "good" or "bad." I think the key is to find a way to make health care costs manageable for both government and individuals.

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