An Italian Economist Looks at Healthcare Spending

Many of you have heard of Pareto analysis. I used it during my manufacturing career many times.

Over 100 years ago the Italian economist Vilfredo Pareto observed that certain events happened at a ratio of about 80 to 20.

He noticed that wealth was not evenly distributed in Italy. 20% of the population owned 80% of the wealth.

Other people started seeing that this pattern worked for a lot of other areas. In manufacturing we noticed that about 80% of the money we spent buying parts for our products was spent on  20% of the parts.

The rule is not hard and fast at 80/20. In some cases it could be 90/10. Or 95/5. Or even 99/1. The point is that the ratio can be skewed towards one small group of a population.

It’s the same with healthcare.

The United States spends more on healthcare than every other country on earth. The average per capita spending in the US in 2022 was $12,555. In comparable countries it is $6,651.

Almost double!

That statistic doesn’t tell the whole story. It makes it sound like everyone in the US spends several thousand dollars on healthcare every year.

Not true. I bet many of you take care of your own health. You don’t spend much on healthcare.

Then there are other people who spend (or an insurance company or the Government spends) TONS of money on healthcare.

And there is a range in between.

That’s where the Pareto analysis comes in.

Very few people spend around the average ($12,555 in 2022).

Here are some more statistics that really tell the story of healthcare spending.

Let’s start with a pretty obvious one. About 30% of the population is over 55. They account for over 50% of overall healthcare spending. Makes sense. As you grow older, your health declines.

The data starts to skew towards the older population. On the other end of the spectrum people under age 35 are 44% of the population and only make up 21% of the healthcare spending.

Here’s where the data really starts becoming skewed. Once you start looking at the percentage of people who make up the bulk of the healthcare spending. This is 2021 data:

· 24% of healthcare spending in the US goes towards 1% of the population

· Over half (51%) of US spending goes to just 5% of the population

· 20% of the US population uses 82% of the healthcare spending (There’s the Pareto rule)

· 50% of the US population, the healthy ones, only utilize 3% of the healthcare spending

The average amount spent on those 1% that needed the most healthcare was $166,980. For the top 5% it was $71,067.

Contrast that with the bottom 50%. For those healthy 50% the average spent on healthcare was $385 in 2021. There were 14% of the population that spent $0 in 2021.

Granted 2021 was a Covid Pandemic year. However, these percentages don’t change much whether there is a pandemic or not.

I bring this up to show that many people are doing just fine without relying on healthcare. They take responsibility for their own health and save everyone a whole lot of money in this process. I don’t believe those bottom 50% in healthcare spenders are just ‘lucky’.

This is not to disparage those who need a lot of healthcare. Accidents happen. Bad luck happens. Thank goodness for all the treatments they receive. But there are a lot of people who are leading unhealthy lifestyles that have the potential to change. And those changes can really help.