weinraub’s words

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Annual Growth, Not Aggregate Growth

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In a [previous post][/2009/09/05/health-insurance-isnt-health-care/], I strongly lauded an article by David Goldhill in The Atlantic about [health care][2]. While my overall opinion is unchanged - the piece is excellent, a clear-eyed, dead-on assessment of what is wrong with America health care - the article does contain one bit which could be improved.

While exploring the growth of the health care payments, the article notes:

Between 1970 and 2006, annual Medicare payments to hospitals grew by roughly 3,800 percent, from $5 billion to $192 billion. Total annual hospital-care costs for all patients grew from $28 billion to almost $650 billion during that same period.

Ok, got it: big numbers, growing by a lot.

But a figure of 3,800% aggregate growth over 36 years is hard to understand. Is that really so large? I imagine so, but who knows what to expect over a 36 year time-frame?

For most people, it is only average annual growth rate that has any meaning. People have a sense of what kind of annual rates to expect on their credit cards, on their mortgages, on their stock portfolios, on company revenues, on their annual salary raises, etc.

The average annual growth rates for the numbers above are approx 14.5% for annual Medicare payments, 17.9% for annual hospital-care costs.

Perhaps it’s less dramatic than quoting billions of dollars and claiming huge multiples over long time frames. But the numbers are more meaningful.

And those are both very scary growth rates.

2009-09-12 Update: It has been pointed out to me that we need to consider not only average annual growth, but rather average annual per capita growth. After all, the population was increasing during that time, so it’s only reasonable that costs would increase somewhat inline with growth. So true. Can’t believe I missed that.

Annual US population growth during that period was less than 2%. So the average annual per capita spending on health costs described above were no more than 12.5% and 15.9%. Still pretty scary.