Health spending for young and old

By Bill Kaye-Blake 28/11/2013

It was good to see the report of the Health Committee on improving child health outcomes. Dr Paul Hutchison, who heads the committee, was doing the media rounds to promote the idea that spending on children’s healthcare is a good investment:

The committee published its report last week on improving health outcomes and preventing child abuse, which makes more than 130 recommendations.

Broadly, the report calls for priority for future health funding to go towards early childhood, including pre-conception and pregnancy.

The report cites the economist Prof James Heckman, and even puts the Heckman graph on the front cover of Volume 1. The graph presents the rate of return on ‘investment in human capital’. It is a useful notional graph — and reflects my own findings on science funding in research I’ve recently been doing. The basic idea is ‘a stitch in time saves nine’ — if we invest in early childhood, pregnancy and even pre-conception, the returns are high:


The basic idea is a good guideline, but its application does seem to lack any sense of marginals. What is the decreasing marginal return from investment? I don’t believe we are anywhere near a BCR under 1.0 for this sort of spending, but it would be nice to have some idea of where we are. There is also a lack of discrimination — all spending on these age groups is equally good. That can’t be true, so some way of separating wheat from chaff  – or hard winter wheat from soft wheat? — would help.

However, the discussion did turn into an either-or: either fund the old people or the youngsters:

Investing more of New Zealand’s health dollar in young Kiwis will not result in shortcomings for the elderly, the head of a parliamentary committee into child health says.

And yes, Hutchison says that it won’t lead to trade-offs, that funding the kids won’t hurt the elderly. But George Lakoff would counter that raising the idea, even negatively, gives it credence.

I’m not, as a good economist, saying that there aren’t trade-offs. Obviously, there are. But Hutchison doesn’t get the framing right, and I’m here to help.

The ‘killer graph’ in the report is this one:


The report seems to be horrified that we are spending all this money on people who are going to die soon anyway. What it misses is that spending on young people has a large investment component, while spending on older people is consumption. The kind of early life spending that Hutchison is advocating is about spending efficiently to get maximum pay-off, and looking for the investment opportunities. Our health care spending at the end of life is about making us feel better, and keeping us alive a bit longer to enjoy family and friends and sunlight on our wrinkled faces. We pay for the consumption by having invested earlier.

The two types of spending shouldn’t be on the same graph. The are conceptually distinct. Comparing them only invites the kind of framing that Hutchison got pulled into rejecting.

The correct comparisons are:

  • the return on investment for early life interventions versus other kinds of public investments, and
  • the utility/satisfaction/value derived from late-life healthcare consumption versus other kinds of consumption, which is hard to describe because you get into a public-private spending comparison, but is still the right comparison
  • the balance between investment and consumption that we collectively want to make with public funding.

So that’s how I would have framed it. That might have avoided the media panic about throwing old people into the streets.