The "Multiplier" Effect of Health Care Spending

By Len Nichols and Henry Sobanet

Henry Sobanet (left)
President, Colorado Strategies
Len Nichols
Professor of Health Policy and Director, Center for Health Policy Research and Ethics, George Mason University
(Photo by Paul Hartmann)

You've hiked to one of Colorado's alpine lakes. It looks like a pristine John Fielder photo: water as still as glass, a fiery pomegranate sky, craggy peaks reflecting on the lake's surface.

Now toss a pebble into the water and watch the ripples spread.

You have just simulated Health Economics 101.

Money moves like the ripples. It reverberates around our communities, generating wave after wave.

A study we conducted shows the stunning power that health dollars create. In economics, we call the ripples "multipliers." The term may sound complex, but the simple truth is this: dollars invested in health care are like bigger rocks and their concentric circles moving through water. Health dollars stay in our communities longer than money spent on other household goods and they trigger bigger and more powerful waves of additional spending.

Our analysis shows that for each $1 we invest in new health care spending in Colorado, we will produce an additional $2.44 in economic output. By comparison, each $1 spent on regular household goods generates $1.61 in economic activity.

Why the disparity? Health care is labor intensive and home-grown. When you invest in health care, you spend money on local hospitals, local doctors' salaries and local schools that educate everyone from nurses to ultrasound technicians to dental hygienists. They, in turn, spend part of their earnings here. However, when you buy a flat screen TV, which is most likely not locally produced, a percentage of your purchase flows back to China or Mexico, fueling factories and workers – plus ripple effects – elsewhere.

We started our study before federal health care reform was a consideration, basing our calculations on the recommendations of Colorado's Blue Ribbon Commission for Health Care Reform, also known as the 208 Commission. As it turns out, commissioners ultimately proposed a health reform package for Colorado that shares four major features of the 2010 federal health reform legislation that passed into law: insurance market reforms, the individual mandate, an expansion of Medicaid, and subsidies for some who are not eligible for Medicaid but still need help to buy private health insurance.

While the Commission's recommendations would have cost Colorado an estimated $1.6 billion in 2010, we have calculated that ensuring health coverage for nearly all Coloradans would have created a net $2.3 billion in new economic output that same year. In other words, all of the upfront costs are recovered and additional economic benefits are realized. As well, the economic benefits of expanded health coverage increase over time. By 2019, the economic output associated with this coverage expansion would grow to $3.8 billion, net of financing.

Certainly, the initial costs for investing in health care are expensive. But, our analysis shows that the gain to the overall economy outweighs the investment, even after taking out the effect of higher taxes and subsequent impacts on spending.

Our analysis also shows a surprisingly large portion of that new spending – 59% – will center on non-health related expenses. So, many businesses, not just those in health care, will experience an economic benefit. For instance, some lower-income Coloradans, who had previously been spending a high-percentage of their salaries on health expenses would receive health subsidies, and therefore would have more cash to spend on other expenses. A previous Trust-supported affordability study found that when families spend more than 5% of their household income on health care, they make substantial tradeoffs on other critical expenditures including transportation, housing and child care.

But expansion of coverage is just one part of the equation; delivery reform also is essential. Consider the soaring increases in health care premiums. No doubt you've heard about the increases in private health care plans from one year to the next – 19% here in Colorado, 25% in Ohio, 39% in California. This is on top of the 22% of family budgets Coloradans already spend on health expenses. Similarly, one-fifth of our state budget funds Medicaid expenses. As private health insurance becomes more expensive, the ranks of our uninsured swell, boosting costs for all of us.

Comparatively, our economic model used much more conservative estimates. We predicted that in the absence of reform, private health premiums would rise by seven percentage points a year. Even at those rates, health care costs would double in 10 years. Essentially, by doing nothing we would be taxing ourselves at ever-rising rates to foot the bill for spiking private and public health costs. In other words, we would have a tough time trying to hold on to the status quo. Without action, the numbers forecast an ominous future: we'll be paying more and getting less.

Despite these bleak projections, across Colorado there are pockets of excellence in innovative efforts to hold down health care costs while producing better outcomes. In Grand Junction, for example, physicians and medical institutions have collaborated to provide exemplary care at significantly lower costs. Colorado's Kaiser Permanente and Denver Health are both national models for aligning financial incentives and organizing health systems to produce better value, rather than simply providing more and more services. In addition, we have both public and private medical home pilot programs which reward doctors for keeping their patients well. Medical home providers coordinate care while cutting unnecessary and duplicative testing and procedures.

So the critical remaining task is to create the mechanisms and opportunities for business leaders and health consumers to support the spread of delivery reform innovations, like the ones mentioned above. By becoming focused buyers, businesses could collectively demand more value for every health dollar spent. We need to reward doctors for outcomes, not procedures. We need to stop chasing the newest, shiniest technologies until they are proven to be beneficial. The arms race over who has the best medical toys must stop. We must reward those who give us excellent, measurable health outcomes while consistently containing costs.

Making these system reforms will not be easy. But clearly the alternative is costing us more and more each year without commensurate gains in value. By improving the health delivery system we can spend less than we otherwise would have, increase Coloradans' health per dollar spent, and enable the overall economy to benefit from improved efficiency.