America’s sickness economy

Welcome back. Why has US GDP growth so vastly outperformed other rich nations over recent decades? The most common answers to what drives “American economic exceptionalism” are technological innovation, strong capital markets, a large consumer base and light-touch regulation.

There are, however, less desirable reasons too. The US government’s unique ability to run high fiscal debts and deficits (which is partly a function of the dollar’s reserve currency status) is one. This week, I propose another: sickness.

The role of healthcare in propping up the US economy is often overlooked. America is the only advanced economy without a system of universal health coverage. The US spends more than $4.5tn annually on healthcare — and is projected to soon account for one-fifth of its economy. Even on a per capita basis, other large, rich nations spend about half as much as America.

Healthcare is the largest component of US consumer spending on services (well above expenditure on recreation, eating out and hotels) — which headlines concerning the insatiable American consumer might not convey.

In the first quarter, the annualised quarterly US economic growth rate fell into negative territory, partly driven by a surge in imports linked to the White House’s tariff policies. Without rising spending on outpatient and hospital services, it would’ve looked a lot worse.

What about the US jobs boom of recent years? The economy has created 3.9mn private sector jobs since the start of 2023. More than half have come from healthcare and social assistance.

The top five US industries by expected revenue this year ordered by size, according to IBISWorld, are health and medical insurance; hospitals; commercial real estate; commercial banking; and drug, cosmetic and toiletry wholesaling.

For all the inputs, America’s health outcomes are exceptionally poor. Life expectancy at birth is around four years below the average for peer nations. It ranks at the bottom of the G7 for infant, maternal and avoidable mortality rates.

Relative to the average prevalence across rich nations, Americans are also more likely to suffer from chronic diseases, including obesity, diabetes, asthma and depression, according to age-adjusted data from the Peterson-KFF Health System Tracker.

The disconnect between high health expenditure and poor outcomes matters because the former features so prominently in measures of US economic activity (and hence our understanding of what contributes to America’s recent economic exceptionalism).

So, what explains America’s high health expenditure relative to other OECD nations? One factor is a lower average health status to begin with, owing in part to lifestyle and diets, says Mark Duggan, a health economist at Stanford University. “The rest can be explained by higher prices, more admin costs, and a higher quantity of intensive and expensive services.”

One interpretation, then, is that the US healthcare system generates more spending — and hence, GDP — in part because of its system and its inefficiencies. Previous studies have estimated that approximately 25 to 30 per cent of health spending could be considered waste.

Regarding prices, centralised health systems tend to have the bargaining power to keep drug fees down, and they have fewer negotiating intermediaries. In the US, hospital mergers have also often resulted in weaker competition and higher prices for patients, without care improvements.

US President Donald Trump signed an order last week aiming to slash drug prices to match those abroad. But details remain sketchy. Plus, there are potential cost-raising pharmaceutical tariffs to factor in.

As for administrative costs, researchers at the Commonwealth Fund estimate that they could contribute to about 30 per cent of America’s excess per capita health spending compared with peer nations.

“Hospitals, physicians and other healthcare providers need to devote huge financial and human resources into approving treatments, getting reimbursements and negotiating prices”, says Duggan. “Many different payers — such as Medicare, Medicaid, commercial plans and private insurance through the Affordable Care Act — complicate this further.”

The US care system perpetuates higher “economic activity” in other ways too. One factor is overtreatment, which is in part a function of the fee-for-service insurance model. Examples cited by studies include overtesting, unnecessary surgeries and excessive use of antibiotics.

Another component is misdiagnosis. US patients are more likely than those in peer countries to report experiencing a medication or medical error at some point during their care, according to a Commonwealth Fund survey. This often requires further treatment.

Then there’s the risk of under-treatment, which is linked to costs. Americans visit physicians less frequently than residents of most other high-income countries. The average length of a hospital stay in the US is also below the OECD average.

“Affordability remains the top reason for why some Americans do not sign up for health coverage, while high out-of-pocket costs lead nearly half of working-age adults to skip or delay getting needed care,” notes the Commonwealth Fund. (US out-of-pocket health spending per capita is well above the rich nation average too.)

For measure, the average total employer-sponsored family health insurance plan reached $25,572 in 2024 (with employees contributing close to 25 per cent on average). Indeed, there are individuals with chronic illnesses that would need to keep working in order to keep their insurance.

In turn, the sickness that can result from avoiding health services or simply working while ill can eventually warrant treatment.

Of course, not all of the US’s excess health spending is unproductive. Some at least goes towards more investment in medical machinery and equipment.

But it does raise the intriguing question of whether reducing wasteful healthcare activities, such as excessive admin and overtreatment incentives, could even reduce US GDP (at least in the short term). I ran through that thought experiment for FT Alphaville last year.

Eric Pachman, chief analytics officer at Bancreek Capital Advisors, who has been monitoring the growth of healthcare jobs through data visualisations, warns that fixing the sector, however necessary, will have near-term economic downsides. “We have got used to healthcare and social assistance adding around 70,000 jobs each month like clockwork,” he says. “How quickly can health workers retrain and find new work?”

In theory, reduced healthcare spending would free up resources that could be reallocated to other expenditures (including more productive ones), assuming gains are not saved. In time, workers can enter other sectors too. So there is no reason why the economy should necessarily shrink long term.

Also, poor health is a drain on America’s potential GDP overall, primarily because it limits labour supply. Goldman Sachs estimates that it holds back US GDP by over 10 per cent.

So, to the extent that any reforms slash waste and boost health outcomes, over time, the US economy would become even more exceptional.

Still, significant sums are going towards poor health outcomes and a system that is, in part, self-perpetuating. And this is picked up in measures of economic activity (as are other less productive activities and expenditures).

This can be corrected for. “There is a value to mortality decline that does not appear in the national income accounts, in the way that health expenditures do,” says Dean Jamison, Emeritus Professor at the University of California, San Francisco in the Institute for Global Health Sciences.

In a recent study, researchers including Jamison estimated the economic value of reducing avoidable mortality. (They found populations globally are willing to concede around one-fifth of their current income in exchange for a year living at the lowest mortality rates observed in the longest living countries, such as Japan and South Korea.)

For example, take France and the US between 2000 and 2019. “Growth in GDP per capita in the US exceeded that in France, but the value of mortality decline in France exceeded that in the US,” notes Jamison. Indeed, when adjusting for relative improvements in mortality risk reduction, America looks much less exceptional.

There are a few takeaways here. First, the US may be exceptional for outperforming other rich nations when it comes to economic activity — but GDP is a deceptive measure of welfare.

Second, to make America healthy again, US health and human services secretary Robert F Kennedy Jr will need a considered plan. Hasty cuts risk near-term economic damage, without waste reduction or long-term improvements in health outcomes. Plans for large cuts to Medicaid in the 2025 federal budget bill risk leaving millions without coverage, according to provisional estimates from the Congressional Budget Office.

And finally, until outcomes improve, it’s best to retire the habit of describing decent out-turns in America’s GDP and job numbers as “healthy”.

Send your rebuttals and thoughts to freelunch@ft.com or on X @tejparikh90.

Food for thought

Does the performance of stock markets appear worse in the news than it actually is? This column reckons media bias towards big news events plays a role.