Tuesday, February 06, 2007

The Math of Growth

Back in the old days when health care as a percentage of the total economy was still in single digits, we thought that surely it could never get higher than 10 %. We didn’t know what would keep it at or below that number, but assumed that the level of public tolerance would be reached and that something would be done.

Well, it didn’t happen. Health care just kept on growing. It is now above 15% and shows no signs of stopping.

I’ve wondered how that could be. And then the other day I did a little simple math that cast some light on the subject – at least for me.

Let us suppose that last year’s economy was 100, with health care being 15 and the rest of the economy 85.

Then let us suppose that the total economy grew by 4% and the health care economy by 10% (not too far off from what has been happening).

The result would be a total economy of 104 (100 x 104%) with the health care portion being 16.5 (15 x 110%) and the rest of the economy 87.5 (104 minus 16.5).

Thus, although the health care sector of the economy grew disproportionately, the rest of the economy still expanded (from 85 to 87.5).

In other words, alarm may be expressed about the inordinate rise in the cost of health care, but the overall economy doesn’t really feel it because the remaining portion is still bigger every year than it was the year before.

At present rates of growth, that could go on for a long time (until health care constituted more than one-third of the economy) before the higher rate of growth in health care stopped the rest of the economy from expanding (you can do the math yourself).

Of course, other factors may intervene – like pressure on government budgets and international competitiveness. But unless they do, health care may well continue its expansion for some time yet.

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