MedCity Influencers

Healthcare’s cost increases suck cash from recovering economy

When the government engages in deficit spending to stimulate demand, it borrows from the future. When the health care sector engages in automatic demand-driven cost increases, it takes its cash in real time from every other sector of the economy, including the government.

Reed Abelson over at the New York Times’ Prescription blog has an interesting report on a new study questioning Detroit’s strategy of relying on health care to bolster its lagging economy. I posted the following comment:

Detroit is merely a microcosm of the nation as a whole. Health care is the only sector that has added jobs throughout the Great Recession, just as it added jobs throughout the previous two decades (see my article in The Fiscal Times here).

What nobody wants to look at is how it continues to do so regardless of economic conditions. The answer is simple. There are no constraints on spending. Providers through insurers pass on rising costs to businesses and consumers in a marketplace where demand elasticity is very low because demand is dictated by the supply side (i.e., doctors/hospitals/input industries prescribe, patients obey).

It’s like Keynesian stimulus with one vital exception, which turns it into its opposite. When the government engages in deficit spending to stimulate demand, it borrows from the future. When the health care sector engages in automatic demand-driven cost increases, it takes its cash in real time from every other sector of the economy, including the government. That may be acceptable when the rest of the economy is growing. During recessions, like now, it becomes a major drag that hampers economic recovery.

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