Most people do not know this, but we spend almost 20% of our money on healthcare in the United States of America. Who knows if running an economy at 20% healthcare is a good thing or a bad thing. Maybe we should spend more! But we are not here to discuss that. We are here to discuss the reasons why we spend almost 20% of our money on healthcare. This article is the first in a series of articles exploring some of the root causes of how we went from 5% of GDP in 1960 to almost 20% in 2021. Hopefully by understanding how we got here we will have a better understanding if 20% of GDP on healthcare is good or bad for our country.
Post-War Boom
In the post-war economic boom following World War 2, healthcare spending was a fraction of what it is today. In 1960 only about 5% of GDP went towards healthcare. Fast forward to the close of 2021 and it was 18.5%. At the height of COVID it reached a high of 19.4%. There is no sign of braking. This train is headed for 20%, and beyond, and fast.
| 1960 | 2020 | |
| GDP (billions) | 540 | 21,060 |
| Healthcare Spend | 28 | 4,085 |
| Percentage of GDP | 5.2% | 19.4% |
If you went back in time to 1960 and told a random stranger that by 2025, 20% of the economy would be healthcare, they would probably laugh at you. They would mock you and joke, “does everybody live to be 150 and have perfect hearing!” If you were honest, you would tell them the truth: life expectancy peaked but is on the decline. Maybe its violence? Maybe its obesity? Who knows. “No,” you would explain, “in 2025 we are actually fat, sick, depressed and dying much younger than before.” Thus, our old pal from 1960 would balk at spending 20% of GDP on healthcare unless there was some tangible benefit: like 150-year lifespans and perfect hearing. Yet of course, we are getting none of that.
The Act of Unintended Consequences
There are a few reasons why we went from 5% to 20%, and one of those reasons is the Stabilization Act of 1942. This act is the definition of unintended consequences. The Stabilization Act of 1942 had little, if nothing, to do with the word “healthcare.” Healthcare wasn’t even mentioned in the language of the act. The act simply froze employers from increasing salaries and hourly wages in response to the massive labor shortages caused by the war effort. All the young men were off fighting and everyone else stayed home supporting the war effort – making tanks, airplanes, ammunition, etc. But the act never mentioned anything insurance benefits. So as businesses do, they adapted and began offering employer sponsored health plans as a workaround to attract and retain talent in a time when labor was tight.
It was the introduction of these fringe benefits into our economy that changed game.
Few People Know or Care How Much Healthcare Costs
It is somewhere in time after the Act of 1942 and American workers and families have a seemingly unlimited pool of dollars for healthcare spending. Luxurious healthcare plans are being used as bait. The users of this healthcare have little incentive to be price sensitive. They just want the best care. Afterall, they are not paying for it, their employer is.
NEWSFLASH: It is a recipe for disaster when there is a high-demand service and somebody else is paying for said good or service. In this sense, healthcare is like a Disney vacation. The employers are Mommy and Daddy, and the covered lives are the kids. The kids don’t care how much anything costs – they just want to have a great time. However, it is up to Mommy and Daddy to put their foot down when things start becoming too costly.
Since 1942 American’s have gotten used to the idea of going to the doctor and not asking questions about pricing. It’s a mentality that someone else is paying for it. I don’t care what it costs. I know it’s probably a lot, but I have insurance. I paid my premium and I want my money’s worth! My insurance will pay for the rest. Someone else is paying for it. Someone else is paying for it. Someone else is paying for it. And I deserve the best treatment!
Will Mommy & Daddy Put Their Foot Down?
Back to our Disney analogy: have Mommy and Daddy had enough? Well, we’ve seen a few signals. Employers have not outright put their foot down, but they have made a few feeble attempts to unburden themselves. Here are a few examples, though not an exhaustive list:
- Emphasis on coinsurance and high deductible plans: these plans shift more burden onto the user and drive cost consciousness and self-rationing. This approach works only to the extent that users choose these types of plans. Plenty of people out there still have low deductible plans and have no incentive to ration their healthcare expenses.
- Employers have mostly replaced pensions with 401ks. Employers simply cannot foot the bill for both healthcare and retirement plans. The 401k approach is a great way to offer some sort of retirement benefit without footing the entire bill.
- Robots and computers do not need healthcare and they do not have families on their plans either. Expect to see companies push for automation whenever possible.
- Outsourcing is another great way to eliminate the need to provide healthcare. Simply pass the burden onto a third-party contractor and let it be their problem. Better yet, send the work overseas and make it their problem.
In survey after survey, employers claim that rising healthcare costs is a huge concern but to-date they have only worked around the issue by minimizing their exposure. So maybe they haven’t had enough? Or maybe the stop-gap measures above are enough. Who knows?
But I know one thing. If you had a time travel machine, every Fortune 500 CEO would sprint to the machine as fast as they could and travel back in time to 1942 and stop the Stabilization Act of 1942.
REFERENCES
https://www.kff.org/report-section/health-care-costs-a-primer-2012-report/
https://data.worldbank.org/indicator/NY.GDP.MKTP.CD?locations=U