NCPA - National Center for Policy Analysis

Health Care's Economic Contributions

April 23, 2002

The debate over health care focuses largely on the issue of rising costs: over the next decade annual health-care spending should reach 17 percent of gross domestic product, up from 14 percent today. But few attempts have been made to quantify the benefits that have flowed from all the spending. In fact, gains in life expectancy do not even show up in gross domestic product or growth figures from the Bureau of Economic Analysis.

But a new paper by Yale University economist William D. Nordhaus defines a concept he calls "health income" -- the amount of consumption an individual would be willing to give up to achieve increased longevity. On this basis, the benefits from health-care spending can be calculated.

  • He estimates that in the first half of the 20th century -- when life expectancy at birth rose from 49 to 68 years -- the value of improvements in health outstripped the value of increased consumption of goods and services.
  • Life-expectancy gains have slowed -- but from 1975 to 1995, life expectancy rose from 72.6 to 75.8 years.
  • By his calculations, the average annual increase in life expectancy was equivalent to increasing consumption by an extra 1.6 percent to 2.0 percent per year.
  • During the 1980s, the increase in health income was approximately twice the growth in spending on health -- making it an excellent investment.

Nordhaus speculates "the social productivity of health-care spending might be many times that of other spending." If this were anywhere near the case, he writes, "it would suggest that the image of a stupendously wasteful health-care system is way off the mark."

Source: Michael J. Mandel, "Economic Trends: Health Care's Economic Payoff," Business Week, April 29, 2002; based on William D. Nordhaus, "The Health of Nations: the Contribution of Improved Health to Living Standards," NBER Working Paper No.w8818, February 2002, National Bureau of Economic Research.

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