Does America spend too much on health care? Has health care been immune to productivity increases and contracted Baumol’s cost disease? David Warsh has some answers.

“cost disease” is mostly bunk — because it relies on measures of input prices instead of output prices…great as are the resources we put into [health care], the value of what we take away is much, much more.

Warsh cites a paper by William Nordhaus. Nordhaus writes,

To a first approximation, the economic value of increases in longevity in the last hundred years is about as large as the value of measured growth in non-health goods and services.

On the other hand, Warsh cites work by Charles Jones. Warsh writes,

as much as 4 percent of US GDP today may be spent on patients in their last year of life. Yet large differences in aggregate spending bring only small gains in life expectancy, at least in the model.

However, Jones himself says that “it is not at all clear that this reflects an inefficiency in the health care system.”

All of this reminds me of the cliche among marketing executives that “half the money my company spends on advertising is wasted. I just don’t know which half.” That is, it would be nice to know more about which expenditures are producing dramatic gains in life expectancy and which are not, but that is easier said than done.

For Discussion (from the Nordhaus paper).

[Imagine] you must choose either (a) 1948 health conditions and 1998 non-health living standards or (b) 1998 health conditions and 1948 non-health living standards. Which would you choose?