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Tuesday, Aug. 14, 2007

Health-care costs to squeeze capitalism


CAMBRIDGE, Mass. — Will the inexorable rise in medical costs around the world someday pose a major challenge to contemporary capitalism? I submit that in the not-so-distant future, moral, social and political support for capitalism will be severely tested as would-be egalitarian health systems face ever-rising costs.

Rising incomes, population aging and new technologies for extending and enhancing life, have caused health costs to rise 3.5 percent faster than overall income for many decades now in the United States. Some leading economists project that health expenditures, which already constitute 16 percent of the U.S. economy, will rise to 30 percent of GDP by 2030, and perhaps approach 50 percent later in the century. Other rich and middle-income countries, although typically spending only half of what the U.S. does today, won't lag far behind.

Countries in Europe and elsewhere have shielded their citizens from a part of this rise by piggybacking on U.S. technological advances. Ultimately, though, they face the same upward cost pressures.

Although the start of the 21st century has marked the death of most ideologies other than capitalism, attitudes toward health care are fundamentally different. Many societies view health care as a right, not a luxury. When medical expenses constituted only a small percentage of income, as was typically the case 50 years ago, an egalitarian approach to health care was a small extravagance.

But as health expenses start taking up a third of national income, health-care socialism starts becoming just plain Marxism: to each according to his needs. Even China's authoritarian capitalism will someday feel the pressure, as its rural populations, who currently have little access to doctors or hospitals, eventually explode with discontent.

One often hears about rising health-care costs in the context of future government budget projections, with old-age health costs expected to dominate growth in government expenditures in coming years. But a careful look at the projections by, say, the U.S. Congressional Budget Office show that the aging of our societies is only a part of the problem, and not the larger part.

The real issue is whether societies are willing to provide elderly people with equal access to ever newer and improved medical techniques.

A change on the horizon that will exacerbate current frictions is the growing importance of individualized health care. For most of modern history, relatively inexpensive public health precautions, such as providing clean drinking water and routine vaccinations, have been the main factor pushing up life expectancy. Public health measures have trumped the importance of individual care.

But today, the balance is shifting. Heart operations are already a major factor in extending life in many rich countries. Sophisticated X-ray diagnostic techniques such as CT scans make it possible to detect many cancers at a treatable stage.

Some drug researchers predict that with continuing advances in understanding the human genome, doctors may eventually be able to predict illnesses 15 to 20 years in advance, and begin prophylactic treatment immediately. (Some experts predict that individuals will routinely live beyond 110 or 115 years by mid-century.)

In addition to reducing mortality, new medical techniques can also have a huge effect on the quality of life. Roughly 250,000 hip replacements are performed in the U.S. each year. Under-60 patients are becoming more important as newer artificial joints prove their capacity to withstand more active lifestyles.

At $6,000, the average cost of a hip replacement is only a thousandth the cost of what it supposedly took to implant a bionic arm, eye, and two legs on the fictional "The Six Million Dollar Man" in the popular mid-1970s' TV show. Of course, hip replacement patients don't get super-human speed, strength and vision — at least not yet. If Tour de France officials think they have big problems now with steroids, just wait 10 years.

In principle, greater use of market mechanisms to allocate health care can slow or even temporarily reverse the rise in health-care costs. But improved efficiency has its limits.

Ultimately, evidence suggests that societies spend ever-larger fractions of their income on health over time, in contrast to food expenditures, for example, which fall as countries become wealthier. Spending pressures, in turn, lead to acceleration of innovation. This raises long-term well being all around, but exacerbates short-term inequalities and frictions.

I am not arguing against health-care capitalism, but warning that support will become fragile. Most countries rely far too much on command and control, and provide far too few incentives for patients and providers to make efficient choices.

Nevertheless, it remains to be seen whether health-care pressures will ultimately cause the current trend toward free (and freer) market capitalism to reverse, with a very large chunk of the economy reverting to a more socialist system. Some societies might decide that it is better to be red than dead.

Kenneth Rogoff is professor of economics and public policy at Harvard University, and was formerly chief economist with the International Monetary Fund.

Copyright 2007 Project Syndicate (www.project-syndicate.org)


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