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GDP to Health Care Expenditures: to Change the Perception, Change the Reality

December 30, 2013

By Jeremiah Norris

In global health, there is no other percentage that has so captured the public imagination and dominated media coverage than the relationship of national health expenditures to Gross Domestic Product (GDP).  In the US, the current figure is 18% of GDP. When published, this percentage ignites a perception that often takes on the value of reality. It is followed by hand-wringing comments in the press and among policy-makers that we spend more than double what other developed countries do and get less in return. This assumes that there is an equivalency within the various components which comprise GDP from developed countries with socialized medicine when compared to a capitalist system. Moreover, the expenditure rate is seen as a resource flow which dissipates into a dark hole in space, notwithstanding the fact that health care itself is a central contributor to the economy, particularly on employment, even in recessionary times.

The US Government’s Bureau of Economic Analysis (BEA) defines GDP as “the output of goods and services produced by labor and property located in the United States. As long as these are supplied by US residents, they may be located either in the US or abroad.”

That is the accepted definition of GDP. But it doesn’t mean that health expenditures within a socialist economy where it is funded through general taxation is measured by the same yardstick as those in the US where it is financed by an equal percentage of public-private sources and delivered almost exclusively through private provision.

These are some items counted towards US GDP but not in socialized medicine countries:

  1. the cost of mal-practice insurance and awards to plaintiffs;
  2. the accelerated depreciation on 5-year schedules of plant and equipment;
  3. health  care employer and employee payroll contributions to Social Security, Medicare, 401 (k) retirement plans, and Workmen’s Compensation Insurance;
  4. and, in most developed countries, capital investments are publicly funded and accounted for through ministries of public works; in the US these same investments are charged against GDP for health.

Canada has a single payer system. When an annual national health budget is passed, it is then divided among the provinces according to population. They can consume the amounts specified in their budget allocations—and then no more. Yet, Canadians spend more on health care than what is accounted for in their national budget. In 2012, more than 40,000 Canadians sought specialty care in U. S. institutions, where their expenditures were charged against US GDP and deducted from Canada’s.

The capital assets in hospitals and medical equipment in the EU are publicly owned, thus there is no need to apply for tax relief on depreciated values. This is a substantial sum in the US as “almost one-third of health care spending pays for hospital services”. EU health care cadres pay one tax into the Treasury for all social services, obviating payroll taxes as in the US for, pension, Social Security, Workmen’s Compensation and Medicare.

Over the past five years, health care jobs in the US have outpaced employment trends overall. They account for one out of every six jobs created by 2012. As jobs disappeared during the Great Recession, health care companies continued hiring. They “added 428,000 jobs throughout the 18-month recession from December 2007 until June 2009 and have continued to grow at a steady rate since the end of the recession.”

The percentage of health care expenditures is lower in “all other developed countries [which] rely on a large degree of direct government intervention and rate-setting to achieve lower-priced medical treatment for all citizens”. For instance, on pharmaceuticals, France and Italy directly regulate prices at launch and subsequent rate of price increases. Germany, the Netherlands, and Denmark operate reference price systems of reimbursement and thereby exert strong pressure on prices charged by manufacturers. The UK operates a system of profit regulation that constrains prices to yield no more than a target overall rate of return on capital. One effect of this regulatory environment is that one of its a major producers maintains a paper registration of corporate ownership on the London stock exchange, but conducts its main manufacturing operations in the US where it can price products on the open market. The Canadian government monitors price levels at launch and rates of increase to assure they are “reasonable”. If US pharmaceutical producers want to be in these markets, then they have to lower their prices and conform to EU regulations, though the same product is available in US markets, often at double the price.  Regulated prices in the EU translate into lower health care expenditures relative to GDP; in effect, they also mean that US citizens are subsidizing health care for their counter-parts in the EU.

To change this perception we have to change the reality. Objective-based research is needed on the relationship of GDP and health care spending since policy-makers allocate resources on the basis of comparisons between developed countries. The measurement has to be of like-things to like-things. There can be little doubt that it isn’t equivalent to compare socialist economies with capitalist economies. On one simple indicator, if EU countries permitted market pricing of drug products, then their ratio of health care expenditures to GDP would be far higher than presently reported in the 8-10% range.

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