Why is American health care so expensive?


It's an interesting question, why American health care is so expensive. It's also an important one as various parties line up to radically change how the system works and throw the odd $ trillion or two around while doing so. As Greg Mankiw, Russ Roberts and others point out, part of it may be to do with the remuneration doctors get. Other explanations are also floated, such as the tax deductibility of employer provided health insurance, excessive treatment in the last few months of life, the way in which the US system carries much of the development costs of new drugs, well, add your bugbear to the list. And there's truth in all of those complaints as well.

It's certainly true that the US spends more of its GDP on health care than other countries, there can be no doubt about that. But why not look at this through the other end of the telescope? What if it's the US that is spending the correct amount of national income on health care and everyone else who is wrong, everyone else that is the piker? That was the thought that Johnny Munkhammar of Timbro floated back in 2005 and I still find it persuasive.

Firstly, take the point that as income changes we spend different proportions of those incomes on different things. Subsistence farmers spend almost nothing on entertainment as they are too busy ensuring they subsist. As incomes rise we quite naturally spend more on leisure, education, clothing, housing and making idiotic TV shows. It isn't just amounts that change, but proportions: food now takes some 10% of the weekly budget as opposed to multiples of that only a few decades ago.

Now, how would we decide what is the "correct" portion of these rising incomes which should be spent on any particular sector? The best way to find out what the individuals whose income it is think about it is to have a free market in it. Let the people choose as it were. Now, neither Munkhammar nor I are saying that the US health care system is an entirely free market. But it's a lot more free than anyone else's in the rich world. So perhaps, as incomes rise, people actually do want to spend 15%, 16% of national income on health care, for that's where they perceive the greatest marginal utility? The biggest bang for their buck?

If this is true then it's the US that has the better system, not us in Europe who deliberately cram down the amount spent on health care as a percentage of national income. We're deliberately denying the will of the people in over riding their wishes and insisting that the Man in Whitehall knows best.