How has medical spending changed and why

Last week, I gave a plenary address to the annual meeting of the American Association of Clinical Endocrinologists on the topic of obesity and the government's role in addressing the issue.  

In my talk, I showed the following graph illustrating the change in spending on medical care expressed as a percentage of GDP from 1960 to 2012 (I created the graph using data from here)

People often use this sort of data to try to illustrate the adverse consequences of obesity and other dietary-related diseases that have risen over time.  That is part of the story.  But, it is also a complicated story, and a lot has changed over time.  

One partial explanation for the change is that Medicaid and Medicare didn't exist in 1960; some of the spending by these programs in 2012 would have occurred anyway but some probably wouldn't have (i.e., some people would have delayed or foregone treatments if they weren't covered by these programs), so that's part of the story.  But, it can't be a huge part, as these two program make up less than half of total spending in 2012.

Another reason we likely spend more of our GDP on medical care today than we did in 1960 is that we are today richer.  Health care is a normal good, meaning that we buy more of it when we become wealthier.  Here, for example, is a recent cross-sectional comparison of how countries that differ in terms of per-capital GDP spend money on health care.

Clearly, the US is an outlier.  But, don't let that distract from the main message of the graph.  Richer countries spend more on health care.  It is almost a perfectly linear trend except for the US and Luxembourg.  

So, let's do a little thought experiment.  In real terms, per-capital GDP in the US in 1960 was around $15,000, whereas today it is around $45,000.  Look at the graph above,  Countries that make around $15,000 in per-capita GDP spend about $1,000/person/year on heath care.  Countries that make around $45,000 in per-capita GDP spend about $5,000/person/year on heath care.  Extrapolating from these data would suggest that we're spending $4,000 more per person on medical care in the US today than we did in the 1960s simply because we're richer today than in 1960.  

If I take 2012 cross-sectional WHO data (173 countries) from here and here, I find the following relationship from a simple linear regression: (spending on medical care as a % of GDP) = 6.47 + 0.033*(GDP per capita in thousands of $).  P-values for both coefficients are well below 0.01.  As previously stated, US GDP per capita has gone up by about $30,000 since 1960.  This means, we would expect the % of our GDP spent on health care to be 30*0.033=0.99 percentage points higher simply as result of income changes.

One final thought experiment.  We are a lot older today than in the 1960s.  For example, 35.9% of the population was under the age of 18 in 1960.  Today that figure is only 24%.  Older people spend more on health care than younger people.  Thus, we'd expect more spending on medical care today than in 1960 because we have more older people today.

Thus, I thought I'd do a crude-age adjusted calculation of medical spending as a % of GDP.    

I pulled data on per-capita spending by age category from the Centers for Medicare and Medicaid Services, Office of the Actuary, National Health Statistics Group and data from the Census Bureau on distribution of age in 2010 and 1960.

Here is the data and my calculations.

The last two columns construct a counter-factual.  The second to last column multiplies the 1960 age distribution by the total population in 2010; it imagines a world as populated as our current one but with ages distributed like 1960.  The last column calculates expected spending on health care with this 1960 age distribution by multiplying per-capita spending by the counter-factual age distribution.

The data suggest we actually spent $2,192 billion on medical spending in 2010.  However, if our nation had been younger, like it was in 1960, we would have only spent $1,922 billion.  Thus, we're spending 14% more in total on health care in 2010 than in 1960 because we are today an older population (of course we're also spending more because there are more of us).  If I express these figures as a percentage of 2010 US GDP, I find that current medical spending (as determined from this particular set of data) is 14.7% of GDP.  However, if we had the 1960 age distribution, medical spending would only be 12.8% of 2010 GDP.

In summary, increasing medical expenditures might indeed be a cause for alarm.  But, that rise is also partially explained by the fact that we are today richer and living longer.  I'd say that's a good thing.

Have American Diets Improved?

We are constantly told things like: "Americans have a national eating disorder" (that's Michael Pollen in Omnivore's Dilemma) or that Americans live in a "toxic food environment" (that's Kelly Brownell in the book Food Fight).

How does that hyperbole match up with the facts?  

Maybe Americans were eating poorly in the past.  But are they eating better today?

Recently released research by Tim Beatty, Biing-Hwan Lin and Travis Smith in the American Journal of Agricultural Economics suggests the answer is "yes" - we are eating better.

They write:

Conventional wisdom maintains that the quality of the American diet has been deteriorating for at least the past two decades. In contrast, we document a previously unknown pattern of improvement in U.S. dietary quality. We find statistically significant improvements for all adults over the period 1989–2008, at all levels of dietary quality.

and

Although we find that higher-income individuals consistently have higher dietary quality than low-income individuals, we also find some evidence that the gap is shrinking over the sample period.

and

We also show that most of the improvement in dietary quality can be attributed to changes in food formulation and changes in demographics. Moreover, we find that changes in food formulation help explain considerably more of the improvement in dietary quality for low-income individuals than for higher-income individuals.

Real-world effect of soda taxes

A new study in the journal Health Economics by Jason Fletcher and coauthors examines whether variation in soda tax policies across states leads to differences in weight and obesity.  

First, the authors note previous work on the issue:

studies using data on individual-level consumption and within-state variation in actual tax rates have found no net measureable effects on population weight. For example, Fletcher et al. (2010a) find that increases in soft drink tax rates decrease soda consumption among children, but do not influence total caloric intake, as children increase their consumption of other high-calorie beverages. This finding is consistent with a similar lack of effects for adults (Fletcher et al., 2010b). Other research taking this approach finds mixed results, demonstrating that average weight in some high risk populations may be more susceptible to soda taxes (Sturm et al., 2010).

Then, they point out a potential problem with this line of research: the variation in tax rates across locations isn't large enough to tell us what will happen if a state passed a "large" soda tax - or whether there are "non-linear" effects:

one concern with the ability of the results from some previous studies to predict the consumption response to large taxes, such as the 18% tax proposed in New York in 2008, and a potential reason for the differences in the results from the various strands of literature is that the existing soda tax rates are too low to be meaningful to most consumers because the average tax rate in 2006 was approximately 5% (Sturm et al., 2010; Todd and Zhen, 2010). Implicit in this argument is that substitution effects would also exhibit a threshold effect, where at high enough soda tax rates, individuals would substitute towards no beverages or low-calorie alternatives (e.g., water).

What did they find?

First, we examine whether there is any evidence of non-linear effects of current soda tax rates, with the idea that if very large taxes could have relatively larger effects, then we should see evidence consistent with this hypothesis based on the larger tax rates in our data, which reach 12%. However, using a variety of specifications, we find no evidence of effects on use or weight for a nationally representative sample of adults.

Our second approach uses a new comparative case-study method that leverages the sudden and large tax increase found in Ohio in the early 1990s. This method creates a ‘synthetic Ohio’ based on a weighted average of states that are most similar to Ohio’s population BMI before the tax was raised. Outside of simulation methods, this is the most informative approach to understanding the potential impact of recently proposed taxes, and it suggests very little evidence that the large tax imposed in Ohio had any detectable effect on population weight. Together, our results cast serious doubt on the assumptions that proponents of large soda taxes make on its likely impacts on population weight.

What would Coase say about obesity externalities?

On my favorite podcast, EconTalk, Russ Roberts recently had an engaging discussion with Robert Frank about Ronald Coase's writings on externalities.  Having recently published a paper about externalities in food production, I couldn't help but apply some of their discussion to the topic of obesity.

The usual claim is that obesity creates an externality because of public health care costs (e.g., Medicare, Medicaid).  My health problem imposes costs on you because your taxes pay for my health problems.  There are good reasons for arguing that this sort of externality is not the type that gets economists up in arms: these are simply zero-sum transfers from the healthy to the sick that don't shrink the size of the pie.  When I try to explain that to people, I normally hear crickets chirp and see eyes glaze over.  That this is not an efficiency-reducing externality is true.  But, it is apparently utterly unconvincing.

Back to Econtalk.  Roberts and Frank discussed Coase's observation that externalities cause reciprocal harm, and many times it is tough to really know who is the offender.  If I play drums loud at night do I cause an externality on my neighbor?  Or did my neighbor create the externality by choosing to live next to me?  Coase's answer to this conundrum, it seems, was: "who cares"?

It doesn't matter who is to blame.  The key question is: what is the lowest cost way to alleviate the externality? It could be making my neighbor move.  It could be outlawing my drum set.  It could be requiring that my neighbor construct a sound-proof barrier.  Or, if we could negotiate, it might be me making side payments to my neighbor to let me play (or him paying me not to play).  By avoiding the offender/offendee mindset, a wide range of possible solutions emerge, many of which are likely lower cost than solutions that might initially come to mind.      

In discussions of obesity-related externalities, the implicit assumption is that the obese are the offender causing harm to the taxpayer (or more cynically, that food companies are causing harm to people who become obese, who in turn cause harm to taxpayers).  Coase's insights, however, suggest that taxpayers are also responsible for harm because they've put themselves in the way of the obese.  The externality wouldn't be there to begin with if taxpayers weren't picking up the tab.  

One really low cost way of resolving this externality is to have taxpayers refrain from picking up the tab for the obese (or at least make the obese pay some significant share of their cost).  Many people would find that solution reprehensible: how dare we get rid of Medicare/Medicaid?  Fair enough, but most private insurance plans impose at least some cost via the use of deductibles to avoid the problems of moral hazard (i.e., people behaving in a riskier way because they know they're insured), and yet by fully insulating people from costs, it seems we've moved in exactly the opposite direction with our public health care.  What about "progressive" public health care deductibles that vary with income?

Coase is perhaps best known for his argument that negotiation can resolve the externality dilemma.  This holds if transactions costs are low.  Frank argued in the podcast that when transactions costs are high, and it is unlikely the affected parties can negotiate, the best public policy solution is to try imagine what would happen if people were able to negotiate.  What would this negotiation look like for obesity externalities?  

One party, "the government" might say: "Tell you what, I'll pay your health care costs if you'll just eat the way I tell you, and if you don't, I'll increase the price of many of the foods you like to eat until you eat the way I want you to."  Some people might take that deal.  Others, I suspect, would respond: "just leave me alone."  

Another conversation.  "The obese" might say:  "Tell you what, I'll promise to eat the way you want me to and I won't complain about public policies affecting my tab at the grocery store if you'll just pay my health care costs."  Some tax payers might say "ok."  Other taxpayers, I suspect, would respond: "just leave me alone."

Another potential cause of obesity - antibiotics

Pagan Kennedy, writing in the New York Times Sunday Review things use of antibiotics by children might be a contributor the rise in obesity in recent decades:

In 2002 Americans were about an inch taller and 24 pounds heavier than they were in the 1960s, and more than a third are now classified as obese. Of course, diet and lifestyle are prime culprits. But some scientists wonder whether there could be other reasons for this staggering transformation of the American body. Antibiotics might be the X factor — or one of them.

How?

Of course, while farm animals often eat a significant dose of antibiotics in food, the situation is different for human beings. By the time most meat reaches our table, it contains little or no antibiotics. So we receive our greatest exposure in the pills we take, rather than the food we eat. American kids are prescribed on average about one course of antibiotics every year, often for ear and chest infections. Could these intermittent high doses affect our metabolism?

As the article points out, we know low-dose feeding of antibiotics to animals increases weight gain.  Is the same thing happening to humans?  It is possible, but it seems a little speculative to me at this point.  Are there really enough antibiotics prescribed in childhood to produce the kinds of weight gains we've seen?  The US has one of the highest rates of obesity in the world - but there are several countries (including France) that prescribe antibiotics more frequently than do American doctors.  In some countries like Mexico and Brazil, a consumer can by antibiotics over the counter.  It would be useful to flesh out some of these sorts of issues before reaching strong conclusions.

Even if the relationship is true, how many parents would be willing to trade-off making a baby's ear ache or strep throat go away against a potential 10 extra pounds at age 30?