Posted on November 14, 2008

Uwe Reinhardt on why health care costs so much


Why Does U.S. Health Care Cost So Much? (Part I)

By Uwe E. Reinhardt
The New York Times
November 14, 2008

The graph (available at the link below) tells a compact story of United States health spending relative to that of other nations.

Shown on the horizontal axis is the gross domestic product per capita in 2006. The vertical axis represents 2006 health spending per capita. The data points in the graph represent two dozen developed countries that are members of the Organization for Economic Cooperation and Development (O.E.C.D.).

The data are expressed in Purchasing Parity Dollars (PPP$). This metric is designed to adjust for cross-national differences in the purchasing power of national currencies relative to the real goods and services. One can think of PPP$s as dollars that buy roughly the same basket of real goods and services in different countries.

You’ll notice that there is enormous variation in health spending per capita in different countries within the O.E.C.D. But the graph also indicates that there exists a very strong relationship between the G.D.P. per capita of these countries (roughly a measure of ability to pay) and per-capita health spending.

Just knowing the G.D.P. per capita of nations helps us explain about 86 percent of the variation in how much different countries pay for health care for the average person. Canada, for example, on average spent only PPP$3,678 on health care per person in 2006, which is about 55 percent of the amount the United States paid per person. But Canada’s G.D.P. per capita in 2006 was also smaller than the comparable United States figure, although not that much smaller (it was 84 percent of the American level).

The line helps us estimate that roughly $1,141 of the $3,036 difference between Canadian and American health spending per capita — or 38 percent — can be explained by the underlying difference in G.D.P. per capita alone.

An additional insight from the graph, however, is that even after adjustment for differences in G.D.P. per capita, the United States in 2006 spent $1,895 more on health care than would have been predicted after such an adjustment. If G.D.P. per capita were the only factor driving the difference between United States health spending and that of other nations, the United States would be expected to have spent an average of only $4,819 per capita on health care rather than the $6,714 it actually spent.

Health-services researchers call the difference between these numbers, here $1,895, “excess spending.” That term, however, is not meant to convey “excessive spending,” but merely a difference driven by factors other than G.D.P. per capita. Prominent among these other factors are:

1. higher prices for the same health care goods and services than are paid in other countries for the same goods and services;

2. significantly higher administrative overhead costs than are incurred in other countries with simpler health-insurance systems;

3. more widespread use of high-cost, high-tech equipment and procedures than are used in other countries;

4. higher treatment costs triggered by our uniquely American tort laws, which in the context of medicine can lead to “defensive medicine” — that is, the application of tests and procedures mainly as a defense against possible malpractice litigation, rather than as a clinical imperative.

There are three other explanations that are widely — but erroneously — thought among non-experts to be cost drivers in the American health spending. To wit:

1. that the aging of our population drives health spending

2. that we get better quality from our health system than do other nations, and

3. that we get better health outcomes from our system

I will comment in more detail on factors that do and do not drive health spending in subsequent posts.


By Don McCanne, MD

Whoa. This one’s pretty heavy, but you really don’t have to understand Purchasing Parity Dollars and the other economic lingo to be able to understand the take-home message.

There is an important reason to present the economic data, and that is that we need to approach health care reform using highly credible factual data. Many individuals have an opinion as to why heath care costs in the United States are so high, but those views are often based on nothing more than hearsay, and often are incorrect. Reform must be based on solid facts.

So what is Prof. Reindardt’s take-home message? Although somewhat repetitive, it is worth emphasizing these points again.

What does NOT increase costs:

1. Living longer does NOT contribute significantly to health care costs. Most health care spending occurs near the end of life, and we are allocated only one death apiece. That spent on chronic diseases during the additional years of life expectancy is negligible when compared to end-of-life spending.

2. Higher quality of health care in the United States is NOT a cause of increased health care costs for the simple reason that the quality of our health care is quite mediocre, on average, when compared with other nations.

3. Better health outcomes are NOT a reason for higher health care costs simply because our outcomes are not better by most measures, and on several measures we are worse.

What DOES increase costs:

1. Nations with a high GDP have more money to spend on health care, and they spend it. (The graph in the original article demonstrates this point well. It also demonstrates that the United States is the single outlier of the two dozen nations, with much higher per capita spending than would be projected by our very high GDP.)

2. The United States pays higher prices for health care services and products than do other nations for the same services and products. This was demonstrated in the Health Affairs article, “It’s the Prices, Stupid.” Our dysfunctional system of financing health care has not been capable of optimizing prices (think of pharmaceuticals). We could do much better using negotiated pricing through a single financing system.

3. Our fragmented, multi-payer system has resulted in profound administrative waste, adding significantly to our high health care costs. Proposals to limit administrative costs of private insurers to 15 percent of their revenues will have very little impact since many are already at that level, and this limit will not provide any relief for the administrative burden that our multi-payer system has placed on the health care delivery system. Administrative savings would be possible only by adopting a simpler health insurance system.

4. Our costs are higher because of our greater use of expensive, high-tech services and equipment that all too often provides no benefit and may even be detrimental. We need to identify those services not providing value so that we can redirect our resources elsewhere (a complex but doable task).

5. Our American tort system has provoked the use of flat-of-the-curve defensive medicine that wastes resources, thereby increasing costs. How we should reform the tort system remains controversial, but it must be addressed.

6. The contraction of our primary care infrastructure has contributed indirectly to our high health care costs. Primary care environments provide quality care at a lower cost. Shifting health care access to specialized environments increases costs through some of the mechanisms listed above. Overuse of emergency departments is a problem because of the strain on the capacities of the system, but it is not much of a contributor to increased costs since the marginal costs of the additional load are quite small.

Everyone agrees that health care reform must address the high costs of health care. Most current proposals merely expand the way we are already paying for care without changes that will have any major impact on these cost drivers.

Instead of expanding our current dysfunctional financing system and then attempting to transform it into a social insurance model, it would be so much easier and much less expensive to simply replace it with a single payer national health program.