Health spending as share of GDP – Economist Writing Every Day

When you look across countries, it appears that the first $1000 per person per year spent on health buys a lot; spending beyond that buys a little, and eventually nothing. The US spends the most in the world on health care, but doesn’t appear to get much for it. A classic story of diminishing returns:

*Source: https://twitter.com/MaxCRoser/status/810077744075866112/photo/1*

This might tempt you to go full Robin Hanson and say the US should spend dramatically less on health care. But when you look at the same measures across US states, it seems like health care spending helps after all:

*Source: My calculations from 2019 IHME Life Expectancy and 2019 KFF Health Spending Per Capita*

Last week though, I showed how health spending across states looks a lot different if we measure it as a share of GDP instead of in dollars per capita. When measured this way, the correlation of health spending and life expectancy turns sharply negative:

*Source: My calculations from 2019 IHME life expectancy, Gross State Product, and NHEA provider spending*

Does this mean states should be drastically cutting health care spending? Not necessarily; as we saw before, states spending more dollars per person on health is associated with longer lives. States having a high share of health spending does seem to be bad, but this is more because it means the rest of their economy is too small, rather than health care being too big. Having a larger GDP per capita doesn’t just mean people are materially better off, it also predicts longer life expectancy:

*Source: My calculations from 2019 IHME life expectancy and 2019 Gross State Product*

As you can see, higher GDP per capita predicts longer lives even more strongly than higher health spending per capita. Here’s what happens when we put them into a horse race in the same regression:

The effect of health spending goes negative and insignificant, while GDP per capita remains positive and strongly significant. The coefficient looks small because it is measured in dollars, but what it means is that a $10,000 increase in GDP per capita in a state is associated with 1.13 years more life expectancy.

My guess is that the correlation of GDP and life expectancy across states is real but mostly not caused by GDP itself; rather, various 3rd factors cause both. I think the lack of effect of health spending across states is real, between diminishing returns to spending and the fact that health is mostly not about health care. Perhaps Robin Hanson is right after all to suggest cutting medicine in half.

State health care spending usually gets reported in terms of dollars per capita, leading to maps like this that show Alaska as the highest-spending state and Utah as the lowest:

*Source: https://www.kff.org/other/state-indicator/health-spending-per-capita/*

But states differ greatly in how rich they are and how much they have to spend. I wanted to know the states where health care takes up the largest and smallest share of the economy, so I got the data:

Health Care Spending as Share of State Gross Domestic Product in 2019:

*Source:* *I divided 2019 National Health Expenditure Provider data on total health spending by 2019 Gross State Product data.*

You can see that health spending as a share of GDP looks pretty different from health spending in raw dollars. We’ve gone from a high-spending North and low-spending South to more of a mix. Health spending is now highest in West Virginia, where it makes up more than a fourth of the economy; and lowest in Washington State and Washington D.C., where it makes up less than one ninth of the economy.

The biggest change when considering things this way is in Washington D.C., which has the highest spending in $ terms but the lowest as a share of GDP because it has an enormous GDP per capita. Many other states that spend a lot in $ also fall a lot in the rankings due to high GDP per capita, including Alaska, New York, and Massachusetts. The states that rise the most in this ranking are poor states like Arkansas, Alabama, and Mississippi. Mississippi rises the most, gaining 37 spots in the rankings of highest-spending states when we go from $ per capita to share of GDP.

I share the data here so you can do your own comparisons:

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