Sunday, July 23, 2017

The Price of Health Care

Even if you are only a little bit familiar with different health care systems in the world, you probably know that America spends more on health than any other country in the OECD in terms of both per capita and percentage of GDP. With such high spending, you would expect outcomes -- such as life expectancy or amenable mortality (basically preventable deaths) -- to be much better than other countries that spend less. Strangely, as data from a recent paper on the German health care system shows, this is not the case.
In spite of massive spending increases and a relatively high baseline in 2000, the US remains significantly behind other developed countries in terms of preventable deaths. On top of this, the improvement in amenable mortality for each dollar of new spending is a lot lower than the other countries.

This is where purchasing power parities (PPPs) come in. High prices for various health care related goods and services such as prescription medication or MRI scans could explain much of America's elevated health care costs, rather than high quantity/quality of care. If this were the case, that would explain why American health care spending continues to rise rapidly without significant improvement in outcomes.

Finding PPP data for different countries would shed light on this because it would give us a good comparison of the quantity of health care that each country consumes as opposed to the amount of money it spends. If the quantity of health care per capita in the US was similar to or less than other countries, then that would explain the lackluster outcomes it experiences.

Until recently there was no data that I could find for health care specific PPPs outside of Europe, but apparently in May the OECD and Eurostat published a report that updated the previous estimates with data from the US and a few other non-European countries. Figure 4 in the report shows that higher prices explain some, but by no means most of all, of the discrepancy between outcomes and spending in the US health care system.
Alternative explanations as to why quality of health care lags spending so much in the US are necessary. Wasteful spending brought on by the gratuitous use of expensive tests and procedures and drugs probably makes a big difference here. Also, if there was a single payer insurance market, the government would have a significant amount of leverage in lowering prices, but it's unclear how much can be gained from fixing incentives and switching to single payer.

Health care spending in America is also highly concentrated among high spenders, suggesting that programs that increase spending on people who currently don't have insurance (and therefore don't spend much right now) won't necessary do much to solve the problem. Reducing total spending might require curtailing superfluous spending on things like cosmetic surgery and rationing expensive procedures that many people depend on.

Ultimately, the US has a lot to gain from health care reform that increases coverage and -- hopefully -- reduces costs, but we should all be wary of thinking we can get a free lunch on health care.

Friday, July 14, 2017

East Asia and Economic Convergence

Japan's impressive post-WWII economic growth is a prime example of economic convergence -- Japan's GDP per capita went from a little under 40% of the US in 1960 to over 90% in the early 1990s. This is a classic prediction of the Solow growth model; poorer countries will have quick economic growth as they invest in capital and will slowly catch up to rich countries like the United States.
Then, all of a sudden, a recession in 1996 and the Asian Financial Crisis in 1997 hit, and Japan has been stuck at roughly 73% of US GDP per capita since then (the data from Fred end in 2010, but World Bank has data from 1990 to 2015 that show the same thing). A lot of ink has been spilled in pursuit of an answer to the question of why Japan has settled into a permanently poorer equilibrium, and I'm not sure if I have much to add. I am highly skeptical that demand side factors can depress an economy for more than two decades, especially when better cyclical indicators like unemployment and employment rates tell the opposite story. Japan's demographic transition is also pretty important -- the working age population has been shrinking since the mid '90s meaning that the amount of workers per person (and consequently GDP per person) has had downward pressure for quite a long time.

Regardless, a 20% reduction in GDP per capita relative to the US is pretty huge, and makes me question my expectation that technologically advanced countries with institutions that don't prevent growth from taking place (think North Korea or Zimbabwe) will unconditionally converge the wealthiest countries. Thinking about this led me to the other major wealth East Asian countries: Taiwan, Hong Kong, and South Korea (Hong Kong is technically a special administrative region in China, but some combination of capitalism and former British rule make it both rich and free enough to count as a separate country in this case).
As you can see these three countries look a lot like Japan did at various points in the past. If you compare at which year each country was in about the same position as Japan in 1960 (that is about 40% of US GDP per capita), you can see how far behind Japan they are in terms of convergence. Hong Kong is the furthest along, although it's about 15 years behind in its process of convergence while Taiwan and Korea come in about 16 and 20 years behind Hong Kong, respectively.

Hong Kong and Japan are the two more interesting cases here: both experienced large slumps in the late '90s that lasted well int the 2000s, but then things start to diverge. In the mid 2000s Hong Kong starts to take off while Japan remains plugging along at around three quarters of US GDP per capita. The real question is which is the exception and which is the rule. As a resident of Japan, a small selfish part of me hopes that Taiwan and Korea will eventually get stuck at around the same level as Japan, but it's really more likely that Japan is mired in its own problems and will continue to stagnate while the other countries grow.

This is easier to see when you look at labor productivity -- GDP per hour worked -- instead of GDP per capita, because things that affect hours worked per employee or the overall employment rate can actually misrepresent the state of convergence.
Labor productivity tells a slightly different story than GDP per capita; while Japan still shows stagnation at around 70% of US productivity after 1996, Hong Kong's recent impressive growth in GDP per capita seems to have been caused by a large increase in either employment rates or hours and Koreans have made up for slower productivity growth relative to Taiwan by working long hours.

Japan's collapse in GDP per capita in the late '90s seems to reflect labor market problems unique to Japan as opposed to evidence against convergence. Average hours worked in Japan has been declining for decades as people unable to find full time employment switch to low paying part time jobs ("バイト").
This is probably a symptom of an economy that has been weak for more than 20 years -- the unemployment rate only recently fell back to the level of the late 1990s -- and has little to do with Hong Kong, Korea, or Taiwan. All four regions do face low fertility rates and will likely start being affected by the same demographic transition as Japan over the next few decades, but as long as they avoid a mass transition to part time employment they should look forward to some combination of fewer hours and higher GDP.

The reason for Japan's slowdown in productivity growth still evades me. I find it hard to believe that it's normal for a country to just stop converging with productivity 30% lower than the US, but I guess Hong Kong, Korea, and Taiwan will be a test of this as they either continue to grow or stagnate relative to America over the next few years.

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