Ezra Klein opines on health care cost growth around the world.

Observers don’t get very excited about the fact that China’s economic growth is frequently three or four times what America enjoys. It doesn’t mean that China’s economy is three or four times better, or its model is somehow desirable. Rather, it’s in large part the function of having a low denominator. China’s economy is much smaller than ours, which means it has a lot more room to grow, and each dollar of expansion is larger in percent terms than it would be in the American economy.

So too with this Business Week graph showing health-care cost growth around the world. The author is quite surprised that the U.K.’s spending growth outpaces ours. But of course it does. The U.K. spends $2,992 per person. The U.S. spends $7,290 per person. To put this in real terms, the U.S.’s 5.8 percent growth works out to a $422 increase per person.

This reasoning is more or less wrong.

First, countries with low incomes don’t grow faster because the denominator is small or because each dollar makes a big impact. The denominator is small for much of Sub-Saharan Africa, where growth has been stagnant during the last 50 years. The denominator is small for North Korea. The denominator was relatively small during Latin America’s lost decade.

Countries with low incomes grow faster because there is conditional convergence. That is, countries with similar institutions and similar polices (perhaps also similar culture, though there is an identification problem here) will tend have the same income. This means the smaller ones grow faster and the bigger ones grow slower. This phenomenon is similar to reversion to the mean.

Likewise, it should not be obvious that the UK’s health care growth rate should be faster than the US. The UK has a radically different health care policy and different health care institutions. Thus, it is not clear that the UK should converge upon the US.

Indeed, one major argument for moving towards a more UK style health care policy is that on their current paths US and the UK will not converge and may even diverge.  That is, even as health care spending grows globally, the US will always be more expensive that the UK and the gap might even widen.

If instead we think that the US and the UK are converging, then the idea that there are cost savings from switching to a more centralized system vanishes. If we look far enough into the future costs in the two countries will be basically the same.

 

Now, what is important is the rate of growth of the overall economy. If it is the case that the UKs economy was growing faster than the US over that period, then there could have been some convergence in terms of spending level but no convergence in terms of spending as a percent of GDP. That is the data that I would be more interested in seeing.

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