Thursday, 6 November 2014

How much should we spend on healthcare?

This post investigates the relationship between longevity and healthcare spending among developed countries. The sample comprises 25 countries from North America, Western Europe, and the Pacific; those with a population of less than 1 million (e.g., Luxembourg) were not included. To measure longevity, I use life expectancy and healthy life expectancy. To measure healthcare spending, I use total healthcare spending per capita at PPP, government healthcare spending per capita at PPP, and non-government healthcare spending per capita at PPP (total spending - government spending). All data, which were obtained from the WHO database, are for 2012 (the latest available year). 

The table below displays simple, bivariate correlations between the two measures of longevity and the three measures of healthcare spending. Surprisingly, all six correlations are negative: longevity tends to be lower in the countries with higher healthcare spending. Two of the correlations are significant at p < 0.05, and one is significant at p < 0.1. Scatterplots of the relationships significant at p < 0.05 are displayed further down the page.

When all rich and poor countries are considered together, there is a positive logarithmic relationship between GDP per capita (a proxy for healthcare spending) and longevity; this is termed the Preston curve. Yet it has long been known that, above a certain point, average income (at least within the range of empirically observed variation) has almost zero impact on population longevity. For example, Costa Rica (with a GDP per capita of around $13,000) has a slightly higher life expectancy than Denmark (with a GDP per capita of around $38,000). 

As the charts below indicate, much of the variation in healthy life expectancy across developed countries is attributable to differences in lifestyle. Most of the relatively long-lived countries are found in East Asia or the Mediterranean (regions known for balanced diets and moderate alcohol consumption), while most of the relatively short-lived countries are found in North West Europe or North America (regions known for excessive consumption of food and alcohol). In addition, average longevity in the US is pulled down by the unusually large number of homicides and fatal car accidents there.

One possible explanation for why the countries with higher government healthcare spending tend to have lower longevity is that individuals take less care of themselves when they know the government will pay their medical expenses. However, evidence for this hypothesis is weak at best, given the small sample size, the lack of controls, and the fact that the correlation is significant for only one of the two longevity measures. The main point is that it there doesn't seem to be any evidence of a significant positive relationship between longevity and healthcare spending.

One conclusion that is perhaps more reasonable to draw from the present analysis is that, in developed countries, funding healthcare is a relatively ineffective form of public spending. Beyond the first couple of thousand dollars per person, money spent on healthcare might be better allocated to education, infrastructure, scientific research, or poverty relief. This is not to say that the government shouldn't provide healthcare or that we should move toward the highly inefficient US system, but simply that once people's basic needs have been taken care of, the return to additional expenditure may be quite low.

This conclusion obviously requires a number of qualifications. First, it might be that, due to our unhealthy lifestyles, longevity in a country like the UK would be much lower if not for our moderate level of healthcare spending. Second, longevity is only one aspect of health. It is possible that, despite living long, healthy lives, the citizens of countries like Singapore, Cyprus and Israel experience considerable psychological distress. Third, some of the variation in healthcare spending across developed countries may be attributable to the fact that citizens from countries with low levels of spending (e.g., Israel) tend to purchase healthcare in countries with high levels of spending (e.g., the US). Fourth, reallocating money away from healthcare might force us to make trade-offs that would be widely regarded as repugnant, such as withholding funding to extend an elderly person's life by a few months (though NICE already does this). Fifth, it is undoubtedly true, at least to some extent, that the absence of price controls on drugs in the US benefits the citizens of every other country. Therefore, it may not be possible for all countries to simultaneously reallocate money away from healthcare without there being some decline in pharmaceutical innovation.    

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