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Welcome home. Why has US GDP growth been significantly better than other rich countries over the last few decades? The most common answers to what drives “American economic exceptionalism” are technological innovation, strong capital markets, large consumer bases, and light touch regulations.
But there are reasons why it’s not desirable. The unique ability of the US government to run high financial obligations and deficits (which is part of the situation in the dollar’s reserve currency) is one. This week I propose another one: Illness.
The role of healthcare in supporting the US economy is often overlooked. America is the only advanced economy without a universal health insurance system. The US spends more than 4.5 tons of healthcare per year, and is expected to soon make up a fifth of the economy. Even per capita, other large, rich countries spend about half of the US.
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Healthcare is the biggest component of consumer spending on services in the US (which outweighs recreation, dining out and hotel spending).
In the first quarter, annual quarterly US economic growth was driven in part by a surge in imports related to the White House tariff policy, partly split into negative territory. It would have looked even worse without increasing spending on outpatient and hospital services.
What about the recent employment boom in the US? The economy has created 3.9mn private sector jobs since its launch in 2023. Over half come from medical care and social assistance.
According to Ibisworld, the top five industries in the US by forecast revenue this year are health and health insurance. Hospitals; Commercial Real Estate; Commercial Banking; Drugs, Cosmetics, Toiletries Wholesale.
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For all inputs, the health outcomes in America are very poor. The average life expectancy at birth is about four years less than the average in fellow countries. It ranks at the bottom of the G7 for infants, maternal and avoidable mortality.
According to age-adjusted data from the Peterson KFF Health System Tracker, Americans are more likely to suffer from chronic diseases such as obesity, diabetes, asthma and depression compared to the average prevalence of rich countries.
Because the former functions so prominently in measuring US economic activity (and therefore to understand that it contributes to recent US economic exceptionalism), a disconnect between high health spending and low outcomes is important.
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So, what explains America’s high health spending for other OECD countries? One factor is low average health status from the start, as it is part of your lifestyle and diet. “The rest can be explained by higher prices, increased management costs and a higher volume of intensive, expensive services.”
Therefore, one interpretation is that the US healthcare system generates more spending and therefore GDP due to its system and its inefficiency. Previous studies estimate that approximately 25-30% of health spending could be considered waste.
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In terms of price, centralized health systems tend to have the negotiating power to reduce drug fees, and there are fewer intermediaries in negotiations. In the US, hospital mergers have weakened patient competition and increased prices, but no improvements in caregiving.
US President Donald Trump signed an order last week aimed at reducing drug prices overseas. However, the details are rough. Additionally, there are drug tariffs that increase costs to consider.
Regarding administrative expenses, researchers at the Commonwealth Fund estimate that they can contribute roughly 30% of US per capita health expenditure compared to their fellow countries.
“Hospitals, physicians and other healthcare providers need to approve, receive refunds and devote their prices to negotiating the enormous financial and human resources,” Duggan said. “Many different payers are making this even more complicated, including Medicare through Affordable Care Acts, Medicaid, commercial planning, private insurance and more.”
The US care system is perpetuating higher “economic activity” in other ways. One factor is overtreatment, which is a function of some service rate insurance models. Examples cited in the study include smooth, unnecessary surgery, and excessive use of antibiotics.
Another component is misdiagnosis. According to a Commonwealth Fund study, US patients are more likely to report experiencing drug or medical errors at some point in their care than patients in peer countries. This often requires further treatment.
Second, there is the risk of lack of treatment, which is linked to costs. Americans visit doctors less frequently than residents of most other high-income countries. The average length of hospital stay in the US is also below the OECD average.
“Affordable prices remain the biggest reason some Americans don’t sign up for health insurance, but high out-of-pocket costs allow nearly half of working-age adults to skip or delay care they need,” says Commonwealth Fund. (US health expenditures per capita are well above the Rich Nation average.)
For measurement, the average employer-sponsored family health insurance plan reached $25,572 in 2024 (employees contribute nearly 25% on average). In fact, there are people with chronic illnesses who need to continue working to maintain insurance.
Second, illnesses that may arise from avoiding medical services or simply working with illnesses may ultimately guarantee treatment.
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Of course, not all of the US excess health spending is counterproductive. Some are at least looking to invest more in medical machines and equipment.
However, it raises an interesting question (at least in the short term) whether reducing unnecessary medical activities, such as excessive managers and incentives for overtreatment, can even reduce US GDP. I ran that idea experiment with the FT Alpha Bill last year.
Eric Pachman, chief analytics officer at Bancreek Capital Advisors, who monitors the growth of healthcare employment through data visualization, warns that even if the sector needs to be revised, there are short-term economic shortcomings. “We’ve become accustomed to the healthcare and social support that adds about 70,000 jobs a month, like clockwork,” he says. “How quickly can health workers retrain and find new jobs?”
In theory, reducing healthcare spending would free up resources that can be reallocated to other spending (including more productive) assuming that profits are not saved. Eventually, workers can also enter other sectors. Therefore, there is no reason why the economy should necessarily shrink in the long term.
Additionally, poor health is a potential GDP outflow across the US GDP, primarily because it limits labor supply. Goldman Sachs estimates it is lowering US GDP by more than 10%.
Therefore, over time, the US economy will become even more exceptional in that reform reduces waste and increases health outcomes.
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Still, a significant amount is directed towards a system that is health outcomes and in part self-persecution. And this is taken up on a measure of economic activity (as well as other less productive activities and spending).
You can fix this. “Like health spending, there’s value in the reduction in mortality rates that don’t appear in national income accounts,” says Dean Jamison, professor emeritus at the University of California, San Francisco, San Francisco, professor emeritus at the Institute for Global Health Sciences.
In a recent study, researchers, including Jamison, estimated the economic value of reducing avoidable mortality. (They found that the global population recognizes about a fifth of their current income in exchange for a year at the lowest mortality rate observed in the longest living countries such as Japan and South Korea.)
Take France and the US between 2000 and 2019, for example. “While US per capita GDP growth exceeded France’s GDP, the value of the decline in France’s mortality rate exceeded the US mortality rate,” Jamison said. Certainly, America appears to be far less exceptional when adjusting for a relative improvement in the reduction in the risk of death.
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There are some takeaways here. First, while the US may be exceptional in outperforming other rich countries in terms of economic activity, GDP is a deceptive measure of welfare.
Secondly, to make America healthy again, Robert F. Kennedy Jr., Secretary of Health and Human Services in the United States, will need a considered plan. Hasty reduces the risk of recent economic damage without reducing waste or long-term improvements in health outcomes. Plans for massive cuts to Medicaid in the risks of the 2025 Federal Budget Bill leave millions without reporting, according to preliminary estimates.
And finally, until results improve, it is best to abolish the habit of decent shifts in US GDP and describing the number of jobs as “health”.
Send your rebuttals and thoughts to freelunch@ft.com or x @tejparikh90.
Food for thinking
Does the news seem to be worse than what stock markets actually perform? This column believes that media bias plays a role for major news events.
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