By ANDREW TSANG
(Part 1 is here)
The Healthcare Economy’s Smoking Gun
That is the generous side of the accounting, where healthcare produces benefits other industries get to keep. The other side coming in shows that healthcare treats damage other industries get paid to cause. Due to size alone, tobacco use is the best example. A cigarette company books a sale and keeps the profit. The lung disease shows up years later, in a clinic, on an insurer’s claim, in a hospital bed, and the company never sees that bill. Cigarettes are a textbook example of a negative externality, a product whose harm lands on people who were never part of the sale. Smoking generated more than $240 billion in healthcare spending. The bill got big enough that states sued the tobacco companies to claw back the public money spent treating smokers, and a 1998 settlement with forty-six states still has them paying. It took a nationwide legal fight to send even part of smoking’s bill back out of healthcare.
Figure 6. Taxpayers pay most of smoking’s medical bill. Philip Morris sells a pack of smokes, but the taxpayers buy most of the lungs.
Part of what we call healthcare’s cost problem is really the cost of everybody else’s products. The smoker’s cancer treatment still enters the accounts as healthcare spending, where it joins the evidence that healthcare costs too much. Yes – hospitals can overcharge, insurers can overburden, and drugs can be overprescribed. But this patient arrived with a disease a cigarette company was paid to cause! Fixing the billing department won’t undo what put them in the bed.
Tobacco just happens to be the one we sued to recoup healthcare costs. Nearly everything this economy sells comes with a side effect, and every side effect clogs up a waiting room. We eat food that is manufactured to be addictive – and obesity alone is tied to $173 billion in annual medical costs. We breathe whatever the plant upwind is burning. We drink water where forever chemicals show up in nearly half the taps in the country. We hand our kids phones full of feeds and ads built to keep them scrolling. Each of these industries sold something people wanted, and healthcare got the patients. There’s no master budget to deal with the harm of the drive-thru, the smokestack, the water main or the feed (both livestock and algorithm). Researchers can only measure some of these harms, and the measurable ones alone trace to about a quarter of everything America spends on healthcare. Healthcare is the only industry that has to absorb all of it, and every dollar gets counted as healthcare’s cost.
The Home for Healthcare
The way these negative externalities are usually addressed is through public health. Clean the water, tax the cigarettes, put guardrails on the highway, and fewer people end up in the hospital. Ergo, that spending is healthcare spending too. Every dollar spent preventing the damage is still a dollar spent on health, so even the fix makes healthcare bigger. It just buys the years upstream, before anyone needs a bed.
If healthcare receives the damage, the next question is whether it should pay to prevent some of it – medicalization is really a philosophical question rather than a pragmatic one. Housing is where that question has the best evidence. In Denver, a program offered people experiencing chronic homelessness and frequent arrests a permanent place to live, rental assistance, and support to help them stay housed. Places were offered at random, so researchers could compare the two groups. Among those whose care could be tracked through Medicaid, the housing group had fewer emergency-department visits and more office-based psychiatric care over two years. Giving people a home changed the care they needed. I don’t know that every housing program saves medical dollars. But once housing changes the need for hospital care, the line between a housing budget and a healthcare budget gets blurry.
So medicalize it. If the growth in healthcare spending bothers you, the fix is more of it, aimed upstream at the social determinants of health—the housing, food, income and safety that shape our health long before we ever see a doctor. Working with healthcare organizations to build programs around them was one of my best experiences. It adds responsibilities to a system already struggling with the ones it has, and I still think it should lean all the way in. We can exclude housing, food, and income from healthcare’s definition. We cannot exclude their consequences from the hospital, so we might as well pay for them before they get there.
Figure 7. Most of healthcare’s thirty years came from outside the clinic. Clean water and sewers did most of the work. That’s why healthcare keeps leaking out of the hospital.
So where does healthcare stop? I would argue that it doesn’t. People keep finding new ways to get hurt, and each one becomes something healthcare has to treat. That’s part of why the bill keeps rising, and it’s why the boundary keeps moving. Healthcare keeps becoming more of the economy because more of the economy turns out to be healthcare. So healthcare will keep growing into what we pay it to do.
Growing Up
While working on both sides of the healthcare payment process, I’ve learned to understand why a hospital bills for a check and an insurer checks the bill. Give each an AI system and the hospital can document more of the care it can bill for while the insurer scrutinizes more claims. Each organization can become more productive at making work for the other. A faster appeal meets a faster denial, and the only thing that grows is the paperwork.
Healthcare is headed from 18% toward 30% either way, so the question is what that growth buys. Today we mostly pay per visit, per test and per claim, and a practice paid per visit will spend whatever time AI saves on more visits. Paid that way, healthcare also grows its own harm, in medical debt, skipped care and infections picked up in the hospital. Pay the same practice to keep people well, and the time goes back to patients. Spent on years of life – that 30 percent would be the best investment the economy has ever made. Spent on claims and denials – it’s the crisis everyone keeps warning about. And if housing is healthcare and food is medicine, more of the economy is about to be paid per visit and per claim too. That’s the payment model to fix before AI speeds it up.
We seldom pay healthcare to add years of life, because whoever pays for the care is rarely the one who collects. A health plan pays for blood pressure pills today. By the time the pills pay off, the patient has switched plans, and the healthy years go to an employer and a family who never saw the bill. That’s the same misbooking that makes healthcare look like it’s failing. Prevention has it worst, because the harm it stops never shows up in anyone’s data. Chesterton’s rule is not to tear down a fence until you know why it was built, and prevention is the fence that looks pointless once the animals stop getting into the yard. A payment system that only pays for what it can count will keep buying claims. Pay for the years healthcare adds, and bill the industries that send the harm in.
Baumol isn’t the only economist healthcare gets wrong. In 1865, William Jevons noticed that as steam engines got better at using coal, Britain burned more of it. That usually gets cited as a warning that efficiency backfires – the same way Baumol gets cited as an example of healthcare inefficiency. The misreading is that whenever care gets cheaper – we just use more of it, and the bill goes up. But in healthcare, more use can be the point. AI is about to do that to everything it touches.
Honestly, productivity by itself is meaningless. An economy that doesn’t produce anything good for life doesn’t matter. Imagine AI writing a million ads, another AI deciding where to place them, a third generating the pages they appear on, and a fourth summarizing those pages so I don’t have to read them. More output, more invoices, more money for the owners, and somehow I still have to close a pop-up. Cheap ads get us more ads. In healthcare, the cheap unit will be whatever we pay for. If that’s care, Jevons is good news, because more health is arguably the whole point. If it’s claims, then we get more claims. Whatever we’re paying for when AI arrives is what it will multiply.
The Human Industry
Automation can do more for care than speed up the bill. AI will let most of the economy make more with fewer humans, the way the factory did, only faster. When it succeeds, we can afford to have more people doing work that still needs them, and healthcare is where the freed-up money and people should go, because its product is time with humans and more years to spend. Helping someone get out of bed is one use for that capacity. Giving a nurse enough time with the patient already in the bed is another. The Bureau of Labor Statistics projects that healthcare and social work will be about 37% of new American jobs from 2025 to 2035. Much of that demand comes from aging and chronic illness. I don’t celebrate people needing more care, but I do want an economy that can provide it. A treatment waiting to be invented and a treatment waiting for an available nurse represent different shortages. An economy that can afford the discovery ought to have an ambition for the nurse.
So here’s my answer to the question I started with: yes, the point of getting richer is to buy more life. Healthcare is the only industry whose product is more human life, the only one that takes in everyone else’s damage, and the place our money and people should go as machines take over the rest of the work. Thus we are left with an existential dilemma—making sure healthcare’s growth buys more life and less business. Healthcare is headed for a third of the economy whether we plan for it or not, and what we pay it for decides whether that third buys years of life or more paperwork. So cut the waste, pay for the years it adds, point the machines at the bedside, and stop apologizing for its size. Strip away everything else. What does that leave?
The only industry that takes the smoker after the cigarettes are sold – and tries to give him more time.
The only industry that sends people back to work, back to school, and back to their own lives – yet never sees the return.
The only industry that still needs a person at the bedside, and can finally afford one once the machines do the rest.
The only industry that pays people to look after other people – and has to keep choosing them over the bill.
The only industry that becomes whatever we pay it to be.
The only industry that is headed for a third of everything we make – and rightfully so.
The only industry that welcomes you into the world, spends everything in between trying to give you more – and tries to make leaving it less painful.
Healthcare is the only industry that matters.
Andrew Tsang is a consultant at Longitude Healthcare Partners and writes about healthcare at his blog, Health Is Other People.
