The Evolution of U.S. Health Care Spending Post World War Ii: An Empirical Analysis: 1948-2009

By Dr. Edgar A. Peden

In 1948 Americans spent five percent of total consumption on health care. Six decades later (2009) this had risen to twenty-one percent. What happened?
Why did the percentage continue to grow? And given current factors and trajectories, this probably will continue in the foreseeable future. The problem
is that a larger health care percentage results in a smaller percentage of other valued consumption: housing, food, education, transportation, and so on.
Finally, add health cares bureaucratic burden. Often getting health care seems more like an Inquisition than purchasing products and services from friendly
merchants and medical providers.

Addressing these concerns, this study examines the post-war economic history of health care spending is examined, using evolutionary economic theory and an
econometric model analyzing 19482009 data. Important causes of health care spending growth include: 1. the initial rule change permitting employers to exclude
employee health insurance premiums from taxation, 2. a feedback pattern wherein greater insurance generates greater spending, which then generates greater
insurance demand, 3. a growing federal presence, such as the Medicare and Medicaid programs, and 4. the rise of both private and public managed care services.
With an ever-growing percentage of health care dollars paid by insurance, it is becoming ever-more bureaucratic, with rules governing every aspect of health care
practices. The conundrum is how to get those consuming health care to become more responsible, while providing a safety net for everyone needing health care,
even for those without an ability to pay. The Conclusion discusses these issues.

• Language: English
• Publisher: Xlibris US
• Release date: Nov 27, 2012
• ISBN: 9781479734382

Dr. Edgar A. Peden

Author bio coming soon

Book preview

The Evolution of

Post-WWII U.S.

Health Care Spending

An Empirical Analysis: 1948-2009

Dr. Edgar A. Peden

Copyright © 2012 by Dr. Edgar A. Peden.

Library of Congress Control Number:       2012919363

ISBN:         Hardcover                               978-1-4797-3437-5

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This is a work of fiction. Names, characters, places and incidents either are the product of the author’s imagination or are used fictitiously, and any resemblance to any actual persons, living or dead, events, or locales is entirely coincidental.

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Contents

Acknowledgements

1. Introduction

2. Relative health care spending history (a quantitative look)

3. Modeling relative health care spending growth

4. Empirical results

5. Conclusion

Appendix

Biography

References

The Evolution of Post-WWII U.S. Health Care Spending

An Empirical Analysis: 1948-2009

by Edgar A. Peden

assisted by Mark S. Freeland¹

A [rule] trajectory is the process by which a novel rule is originated, adopted, and retained in a carrier population, such that it eventually becomes coordinated in the economic system resulting in a new economic order.

-Kurt Dopfer and Jason Potts, The General Theory of Economic Evolution, p 12 (2008)

ABSTRACT: Post-World War II U.S. government data (1948-2009) show that the health care spending percentage of consumption (relative health spending) rose from 5.3 to 20.9 percent, starting after the permanent extension of the (initially war-related) tax exclusion of the employer costs of employee health insurance. The rule change, abetted by a rise in real income, has been highly correlated with the ensuing rise in coverage demand (1) by firms without coverage competing for employees and (2) by employees seeking to expand what was covered. These two factors raised coverage levels and increased the demand for health care and subsequently increased both relative health spending and relative medical prices. An autocatalytic (i.e., self-generating) feedback pattern emerged whereby these two factors led to further increases in coverage demand, which in turn led to growth in these two factors once again. This inter-temporal process followed a trajectory closely approximated by the logistic diffusion growth model equation, which this study estimates using the above-noted government data. The rising prices of medical care eventually resulted in appeals for government coverage for those without access to employer insurance, inducing the U. S. government in 1966 to provide coverage for the elderly (through Medicare) and the poor (Medicaid); other coverage (e.g., for the disabled) was added later. Adding government coverage appears to have accelerated demand still more, raising both relative spending and prices. The autocatalytic pattern continued until the early 1990s when managed care instituted by insurance companies and government regulation constrained relative health care spending to about 17 percent from 1991 to 2000. However, rising coverage levels were undoubtedly what caused this percentage to grow once again from 2000 to 2009 in spite of continuing—and even increased—rules and government regulations. My econometric estimates are consistent with an emergent complex self-organizing health care market, characterized historically by the above noted logistic diffusion equation. Relative health care spending and prices were still rising as of 2009, suggesting that further coverage expansion, such as the Affordable Care Act of 2010, would accelerate both relative spending and price growth yet again.

Acknowledgements

The first person I want to thank is Elizabeth Stallman-Brown, my editor. Her expertise and help in preparing the manuscript has been invaluable. Her patience and kindness has made her a joy to work with. The assistance I received from my good friend and colleague Mark Freeland (from the Center of Medicare and Medicaid Services, Office of the Actuary) has been a great help in putting this book together, starting from the time two decades ago that he first proposed doing the precursor to the current work. Cathy Cowan, Mark’s co-worker, has provided me with the data I needed in a timely, professional, and pleasant manner, even as I sought to update it each year or asked her for supplementary data.

Finally, I want to thank my loving wife, Kathryn Groth, who shared the trials and stresses of this study. Her comments (even though her expertise lies elsewhere) proved to be valuable to me in all I did.

1. Introduction

There are three kinds of lies: lies, damn lies, and statistics.

-Popularized by Mark Twain (originated by Leonard H. Courtney, 1895)

Counter to what Mr. Twain might have advised, this study’s going to do it again; that is, develop a hypothesis, and then—using statistics—test it with government data (and we all know they don’t lie, don’t we?).

This study updates 1995 and 1998 analyses of post-World War II (WWII) National Health Expenditure (NHE) data.i The previous studies used a standard neoclassical model. The current study covers additional years through 2009, adds managed care and government regulatory effects, and uses an evolutionary economic model of a health care sector characterized by complexity and emergent properties. My central purpose here is to explore, from an evolutionary perspective, the drivers of the persistent growth in relative health spending. In particular, why do we all pay such a large and growing portion of our income for health care "and yet, in many cases, not receive the health services we need?

This study agrees with two previous findings (by myself and a coauthor) that relative health spending growth has been induced by increasing insurance coverage levels. All three studies agree that the root of the growth in relative health spending was a single rule change, the post-war extension of the employer tax exclusion for