Why is the Growth in Health Spending Considered a Problem?

Consumer discretionary spending is the major driver of the U.S. economy as household purchases make-up about 71 percent of U.S. gross domestic product (GDP).

Without growth in consumer spending, the economy would most likely go nowhere.

Since economic growth is generally considered a good thing, it stands to reason that we should be looking for things that contribute to consumer spending.

An interesting piece of research from an economist at Credit Suisse shows that health spending has been the primary driver of the growth in consumer spending over the past 50 years.

As reported in a Bloomberg piece, consumer spending has increased from 61 percent of GDP in the 1960s to roughly 71 percent today.

When health expenses are excluded, though, the growth in consumer spending is basically unchanged over the past half century. 

So if we remove healthcare expenses from the equation, the surge in consumer spending and a good portion of GDP growth disappear.  And as our society ages and retires over the next several decades, the strong relationship between health spending and economic growth will almost certainly continue.

Given these facts, it makes sense to ask why the growth in health spending is considered by many to be such a problem.  We are constantly bombarded with messages about how healthcare expenses are out of control, unsustainable and need to be reigned-in.

If spending trends are any indication, people consider it more important to spend on their health than on clothes, cars, or houses.

Shouldn’t we be encouraging health spending since it is such an important factor in economic growth—particularly at a time when the economy faces the prospect of prolonged deflation?

The crux of the problem seems to be the inability of those who have promised to pay for healthcare spending to actually do so.

Health expenses are the major component of entitlement spending, and entitlements are eviscerating the discretionary budgets of governments around the world.  Debt-constrained governments are therefore forced to try to limit the growth in health spending.  Governments do so, though, at what may be their own peril as reigning-in health costs could limit a key source of economic growth.