Optimal health spending

Greg Mankiw isn’t impressed by Obama’s comments on health spending. Obama thinks that increasing health spending without limit is a bad thing. Mankiw points to a QJE article that suggests increasing health spending is optimal:

As people get richer and consumption rises, the marginal utility of consumption falls rapidly. Spending on health to extend life allows individuals to purchase additional periods of utility. The marginal utility of life extension does not decline. As a result, the optimal composition of total spending shifts toward health, and the health share grows along with income. In projections based on the quantitative analysis of our model, the optimal health share of spending seems likely to exceed 30 percent by the middle of the century.

What I find interesting is the choice of assumptions in this article. The authors assume diminishing returns to consumption spending, but constant returns to extra years of life. Obviously this means that, as consumption utility becomes saturated, more will be spent on health care as incomes rise. The assumptions drive the outcome in a way that the authors are very clear about. But is there really a constant return to extra years of life?

I wouldn’t have thought that a year of life at age 85 is equal in utility to a year at age 25. But then I have no experience so I’m just guessing. Health spending probably increases the marginal utility of an extra year, but is the MU really age invariant? I’d be interested to know what people think about this one since I have nothing but prejudice to go on 😛

9 replies
  1. What would Hayek say
    What would Hayek say says:

    Will buy argument of more being spent on health care as income rises (same argument as spendng more on environment, luxuries as wealth rises), also since death is forever, there is no future benefit stream, so any day above ground has a benefit stream. However whilst willingness to pay increases, you have a decreasing return on expenditure, e.g $1 at 25 buys 1 year, $10 at 60 buys 1 year, $100 at 70 buys 6 months, $1000 at 75 buys 6 months, $10,000 at 85 buys 6 months, $10,000 at 90 buys 3 months. So what you have is decreasing returns on additional marginal expenditure (productivity story). So withour reading Greg Mankiw views, the problem with the QJE article is that they have only considered half the equation. If this is about govt expenditure they need to consider the counterfactual return on the extra dollars expenditure (i.e. greater QALY gained by investing in immunisation for 5 year olds, warm homes, better internet etc).

    If its just private consumption of health care, then the additional consumption is only limited by your personal endowments. On this basis Bill Gates possibly could live to be 200+.

  2. Pet Medication
    Pet Medication says:

    Rich people will use all possible way to treat any health issues no matter how much it costs. I agree on the view that many spending more on health issues these days. Any new health product that hit town will surely be on good sales.

  3. the website guy
    the website guy says:

    What I dont understand is how most people were talking about how amazing Obamas health plan was before he was elected… now all I seem to hear about is how people hate what hes trying to do. Has he changed his position since being elected or did people just not pay attention at first?

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