If health care in the U.S. were as cost efficient as the delivery of cosmetic procedures, Americans would have saved $1.19 trillion last year.
Gale Pooley, Marian L. Tupy —
Professor Mark J. Perry from the American Enterprise Institute produces an annual report on the costs of cosmetic procedures, and hospital and medical care services. Between 1998 and 2018, the average cost of cosmetic procedures rose at a slower pace than inflation. In contrast, hospital and medical care costs rose well above inflation. Thus, while the former became more affordable, the latter became less affordable. We take Perry’s analysis a step further by looking at the time prices of cosmetic procedures and conclude with a few remarks about the cost of healthcare in America.
According to Perry’s analysis, inflation in the United States amounted to 54 percent over the last 20 years. Over the same time period, the nominal cost of 19 cosmetic procedures increased by 34 percent (unweighted average) or 32 percent (weighted average). In inflation-adjusted terms, therefore, the cost of cosmetic procedures fell. In contrast, hospital and medical care costs rose by 202 percent (four times the rate of inflation) and 110 percent (twice the rate of inflation) respectively. As Perry notes,
The competitive market for cosmetic procedures operates differently than the traditional market for health care in important and significant ways. Cosmetic procedures, unlike most medical services, are not usually covered by insurance. Patients typically paying 100 percent out-of-pocket for elective cosmetic procedures are cost-conscious and have strong incentives to shop around and compare prices at the dozens of competing providers in any large city. Providers operate in a very competitive market with transparent pricing and therefore have incentives to provide cosmetic procedures at competitive prices. Those providers are also less burdened and encumbered by the bureaucratic paperwork that is typically involved with the provision of most standard medical care with third-party payments.
Let’s interrogate Perry’s data a bit differently. Goods and services can become more affordable in two ways. First, the money price can decrease. Second, hourly income can increase. Note that incomes tend to rise faster than inflation, because people tend to become more productive over time. That’s a good thing, for as the Scottish economist Adam Smith noted in The Wealth of Nations 243 years ago, “The real price of everything…is the toil and trouble of acquiring it…What is bought with money or with goods is purchased by labor.”
The time price captures both the price fluctuations and the value of labor. As such, it better reflects the availability of goods and services in any given society. The time price can be defined as “the amount of time that a person has to work in order to earn enough money to buy something.” To calculate the time price, the nominal (or current) money price is divided by nominal hourly income. Dollars and cents are thus converted to hours and minutes of labor.
Having obtained the nominal prices of the 19 cosmetic procedures from Perry’s report, we then acquired the average hourly income data from www.measuringworth.com. This source, which is curated by Lawrence H. Officer of the University of Illinois at Chicago and Samuel H. Williamson of Miami University, includes nominal hourly wage rates of unskilled laborers and nominal hourly compensation rates of blue-collar workers. (On average, blue-collar worker receive about a third of their total compensation in benefits, including bonuses, paid leave, and company contributions to insurance and retirement plans.) What did we find?
The cost of the 19 cosmetic procedures relative to the wages of unskilled laborers fell by 26 percent on average. For the same amount of labor that an unskilled laborer had to work to earn enough money to purchase one item in our basket of cosmetic procedures in 1998, he or she could buy 1.35 items in 2018.
The cost of the 19 cosmetic procedures relative to the compensation of blue-collar workers fell by 31 percent on average. For the same amount of labor that a blue-collar worker had to work to earn enough money to purchase one item in our basket of cosmetic procedures in 1998, he or she could buy 1.45 items in 2018.
Finally, consider an upskilling worker, who is defined, solely for the purposes of this article, as an employee who started as an unskilled laborer in 1998, but acquired additional skills and ended up as a skilled worker in 2018. Such a worker would see the cost of 19 cosmetic procedures decline by 71 percent on average. For the same amount of labor he or she had to work to earn enough money to purchase one item in our basket of cosmetic procedures in 1998, he or she could buy 3.4 items in 2018.
Total nominal health care spending in America rose from $1.2 trillion in 1998 to $3.65 trillion in 2018. That amounts to 204 percent. In other words, the overall healthcare costs rose 6.3 times faster than Perry’s weighted average of cosmetic procedures (32 percent). If the overall provision of health care in the United States were as cost efficient as the delivery of cosmetic procedures, Americans would have spent $1.58 trillion (in 1998 dollars) on health care in 2018. That amounts to $2.46 trillion in 2018 dollars. Thus, the savings last year would have amounted to $1.19 trillion.
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The time price of airfares has fallen 38.1 percent in five years.
Gale Pooley —
Airports will be busy again this Christmas. According to Kayak data, domestic flight searches are up 155 percent compared to 2020, though they are still 43 percent lower than in 2019.
Fortunately, we continue to enjoy the gift of decreasing airfares. The Bureau of Labor Statistics reports that since 2016, airfares have decreased in price from an index value of 270.9 to 203.8, or 24.8 percent.
Since we buy things with money but pay for them with time, we prefer to analyze the cost of airfares using time prices. To calculate the time price, we divide the nominal price by the nominal wage. That will give us the number of hours of work required to earn enough money to buy an airplane ticket.
We can calculate the time prices using data from the Bureau of Labor Statistics. They report that the nominal blue-collar hourly wage increased by 21.5 percent from $21.72 in 2016 to $26.40 in 2021.
It took 12.47 hours to earn enough money to buy the average airplane ticket in 2016. Today, it takes just 7.72 hours. That’s a decline of 38.1 percent.
For the same amount of time working, you can get 61.6 percent more airfares today than in 2016. Flying abundance has been growing at a compound annual rate of around 10.7 percent a year. At this rate, we get twice as many flights every 7.22 years.
Excerpt from our forthcoming book, Superabundance.
Human genome sequencing has become over a million times more abundant since 2003. In the near future, the price may drop another 90 percent from $1,000 to $100.
Gale Pooley —
The Human Genome Project was an international effort to map the entire three-billion-letter human genome. The project launched in 1990 and concluded its work in 2003 – 50 years after James Watson and Francis Crick discovered the double-helix structure of DNA. The U.S. government contributed $3.8 billion toward the project, though the cost of the actual sequencing was lower.
Dr. Eric Green, the director of the National Human Genome Research Institute, recalled that “the first genome cost us about a billion dollars … Now when we sequence a person’s genome, it’s less than $1000, so that’s a million-fold reduction.”
Note that blue-collar worker hourly compensation (wages and benefits) rate increased by 51 percent between 2003 and 2020 (i.e., from $21.54 to $32.54). Consequently, it would have cost that worker 46,425,255 hours of work to earn enough money to buy his or her DNA sequence in 2003, but only 30.73 hours of work to do so in 2020.
The time price of DNA sequencing, in other words, dropped by 99.99993 percent. For the same hours of work required to earn the money to buy one DNA sequence in 2003, a blue-collar worker can get over 1.5 million sequences today. That amounts to over a 150 million percent increase in DNA sequencing abundance.
Now a group of Chinese entrepreneurs at the BGI hope to get the price down to $100 using a robotic arm and a roomful of chemical baths and imaging machines. Rade Drmanac, chief scientific officer of Complete Genomics, a division of BGI, noted that at $100, genetic sequencing could soon be common for every child at birth.
The National Human Genome Research Institute tracks costs associated with DNA sequencing and produced the chart below. Note the logarithmic scale on the vertical (i.e., Y) axis:
Exponential innovation occasionally experiences a double exponent or punctuation as it did in January of 2008 when DNA sequencing transitioned from the Sanger method (i.e., dideoxy chain termination sequencing) to “second generation” or “next-generation” DNA sequencing technologies.
A fall in the cost of DNA sequencing from $1,000,000,000 to $100 over 20 years would imply a compound rate of decline of 6.5 percent a month. (Adjusting for the time price puts the compound rate of decline at 7.13 percent per month.) Moore’s law indicates that prices of computing decline at 2.85 percent a month. So, the cost of DNA sequencing per genome may amount to the fastest price decline in history.
Long live learning curves. The knowledge they create is our true wealth.
