U.S. Health Care and U.S. Productivity: A Dissent

One of the great myths about American society is that our lack of a “universal” health plan harms our competitiveness. The masters of this refrain, of course, are the American automakers.  Years before driving themselves into bankruptcy and the unwelcoming arms of their new owners, the American taxpayers, they used to claim that they spent up to $1,600 per car on health care. This was more than they spent on steel, and a multiple of what they claimed their foreign competitors spent. Yet we don’t hear Mark Zuckerberg complaining that Facebook’s health care costs are preventing him from competing against foreign social-media businesses.  Indeed, while all Americans complain about health costs, the argument that our health “system” reduces our competitiveness versus other countries with “universal” health care is actually quite weak.  Indeed, the percentage of all firms offering health benefits actually increased from 66 percent in 1999 to 69 percent in 2010, and a greater number of smaller firms have begun to offer health benefits, according to the Kaiser Family Foundation.

In her well received book, Who Killed Health Care? America’s $2 Trillion Medical Problem — And the Consumer-Driven Cure, Professor Regina Herzlinger of Harvard Business School finds that complaints about employer health care costs are inflated (pp. 104-105). Even if they were not, economic studies show that health insurance and other employee benefits are paid by workers in the form of reduced wages. So does this mean the American worker is worse off than his foreign counterpart?

One oft-cited metric is that the United States spends far more on health than other countries as a share of Gross Domestic Product (GDP).  But this measurement can mislead.  It is a ratio composed of a numerator and a denominator. The numerator — the nominal cost of medical care — has grown slightly slower in the U.S. than in Europe. Advocates of government monopoly health care point out that Canadian and U.S. health spending as a share of GDP was about the same before the Canadian government took over health care, but diverged starting in 1970, soon after the government completed its takeover. They present this as evidence that the state can control costs better than the private sector. However, real GDP growth in Canada dramatically outpaced U.S. growth between 1969 and 1987, meaning that the denominator (GDP) of the health spending grew much faster in Canada, not that the numerator of health spending grew much slower, according to research by Professor Brian Ferguson.

Common sense indicates that richer countries will spend more on health care. In The Business of Health: The Role of Competition, Markets, and Regulation, Robert L. Ohsfeldt and John R. Schneider show that health care is a superior good in this country and abroad. As income goes up, people choose to devote a greater share of their income to health care.

This finding challenges our intuition because it is hard to grasp how much more U.S. workers earn than workers in other countries, and how much more buying power this gives us.  According to data extracted from the International Labor Organization, U.S. GDP per capita is far greater than almost any other nations’ and this is largely due to American productivity.  U.S. GDP per person engaged (employed) in 2008 was $65,480, followed by Hong Kong at $58,605 and Ireland at $55,986. Some of this was due to Americans working longer hours, but mostly it was due to greater value produced per hour worked.  Workers in most developed countries produce between 60 percent and 90 percent of the value that U.S. workers produce.

The table below (drawn from a recent analysis) compares the U.S. with four countries whose health care systems are often held up as admirable options: Canada, Germany, France, and Great Britain.  In all these countries, GDP per capita was significantly less than the United States.  France was the second most productive, with a productivity rate 91 percent of the United States.  Germany lagged at 72 percent. The U.S. spent significantly more on health care per person than comparable countries. Nevertheless, Americans still have much more money left over after paying for health care. Indeed, we have between $4,500 and $8,400 more income per capita than Germany or France — after paying for health care — a “bonus” of American productivity.

American crusaders for “universal” health care emphasize America’s uniqueness in not having it.  Given the benefits of America’s productivity, perhaps it is a uniqueness we should not rush to abandon.

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