Do We Really Spend More and Get Less?

Do We Really Spend More and Get Less?

106
SHARE

The conventional wisdom in health policy is that the United States spends far more than any other country and enjoys mediocre health outcomes. This judgment is repeated so often and so forcefully that you will almost never see it questioned. And yet it may not be true.

Indeed, the reverse may be true. We may be spending less and getting more.

The case for the critics was bolstered last week by a new OECD report that concluded:

The United States spends two-and-a-half times more than the OECD average health expenditure per person … It even spends twice as much as France, for example, a country which is generally accepted as having very good health services. At 17.4% of GDP in 2009, U.S. health spending is half as much again as any other country, and nearly twice the average.

Similar claims were made recently in The New York Times by former White House health advisor, Zeke Emanuel, who added that we are not getting better health care as a result. The same charge was aired at the Health Affairs blog the other day by Obama Social Security Advisory Board appointee Henry Aaron and health economist Paul Ginsburg. It is standard fare at Ezra Klein’s blog, at The Incidental Economist and at the Commonwealth Fund. It is also unquestioned dogma for New York Times columnist, Paul Krugman.

What are all these people missing? On the spending side, they are overlooking one of the most basic concepts in all of economics.

When you and I buy something, the cost to us is the price we pay for it. But that is not necessarily true for society as a whole. The social cost of something may be a whole lot more or a whole lot less than what people actually spend on it; and that is especially true in health care.

In the United States and throughout the developed world, the market for medical care has been so systematically suppressed that no one ever sees a real price for anything. Patients never see the real price of the care they receive; doctors never receive a real price for the care they deliver; employees never see a real premium for their health insurance, etc.

In the United States, for example, a typical doctor is paid one fee by Medicare, a different fee by Medicaid, and a third fee by BlueCross. Moreover, there are different fees for all the other insurers and for all the employer plans. These fees do not count as real market prices, however. Instead, they are artificial payments that often reflect the bargaining power of the various payer bureaucracies. When government accountants sum up all the spending on health care, therefore, they are adding artificial price times quantity, for all the separate transactions, to arrive at a grand spending total.

Here is the kicker: since each separate purchase involves an artificial price, no one knows what the aggregate number really means. To make matters worse, other countries are more aggressive than we are at shifting costs and hiding costs. They use their buying power to suppress the incomes of doctors, nurses and other medical personnel much more than the United States does, for example. In addition, formal accounting ignores the cost of rationing in other countries. In Greece, patients spend nearly as much on bribes and other “informal” payments as they do on “formal” costs such as insurance co-pays. Yet these bribes do not show up in the official statistics. Bottom line: in comparing international spending totals, we are usually comparing apples and oranges.

Let’s take doctor incomes and government health care programs. One way to pay doctors is to pay market prices — whatever fees are necessary in order to induce them to voluntarily provide medical services. Another way is to draft them and pay them little more than a minimum wage — as the government has done in the past in times of war. Obviously, the second method involves a lot lower spending figure. But to economists, the social cost is the same in both cases.

The reason? To economists, the social cost of having one more man or woman become a doctor is the next best use of that person’s talents. Instead of becoming a doctor, the pre-med student might have become an engineer, say, or an architect. So what society as a whole must give up in order to have one more doctor is the loss of the engineering or architectural goods and services the young man or woman would otherwise have produced. This cost, called “opportunity cost,” is independent of how much doctors actually get paid.

The principle also applies to other medical personnel and to buildings and equipment. The opportunity cost of a hospital, for example, is the value of a commercial office building or some other use to which those same resources could be put.

The concept of opportunity cost allows us to see that if we don’t trust spending totals in the international accounts, there is another way to assess the cost of health care. We can count up the real resources being used. Other things equal, a country that has more doctors per capita, more hospital beds, etc., is devoting more of its real income to health care than one that uses fewer resources — regardless of its reported spending.

On this score, the United States looks really good. As the table below (from the latest OECD report) shows, the U.S. has fewer doctors, fewer physician visits, fewer hospital beds, fewer hospital stays and less time in the hospital than the OECD average. We’re not just a little bit lower. We are among the lowest in the developed world. In fact, about the only area where we “spend” more is on technology (MRI and CT scans, for example), as is reflected in the second table.

Almost a decade ago, Mark Pauly estimated the cost of health care across different countries based on the use of labor (doctors, nurses, etc.) alone. The finding: The U.S. spends a lot less than such northern European countries as Iceland, Sweden and Norway and even less than Germany and France!

What about outcomes? Do we get more and better care for the resources we devote? Here the evidence is mixed. As the second table shows, we replace more knees per capita than any other country and it’s hard to believe that any of these are unnecessary procedures. On the other hand, if you think that there are too many tonsillectomies and Caesarean births, our ranking there (2nd and 8th, respectively), may be less admirable. Avik Roy has a nice presentation of cancer survival rates. The U.S. basically leads the world.

What about life expectancy statistics — a favorite of the critics, since Americans don’t score very high? It turns out that when you remove outcomes doctors have almost no impact on — death from fatal injuries (car accidents, violent crime, etc.) — U.S. life expectancy jumps from 19th in the world to number one!

This isn’t to say we don’t have problems. There is a lot of evidence of waste and inefficiency in U.S. health care. Still, it’s not clear that we have any reason to feel inferior to the rest of the world.

John C. Goodman, PhD, is president and CEO of the National Center for Policy Analysis. He is also the Kellye Wright Fellow in health care. His Health Policy Blog is considered among the top conservative health care blogs where health care problems are discussed by top health policy experts from all sides of the political spectrum.

Leave a Reply

106 Comments on "Do We Really Spend More and Get Less?"


Guest
Dec 1, 2011

I’m glad you explained that. I thought health care inflation was real but it’s really something I imagined. I feel all better just knowing.

Guest
Dr. Mike
Dec 1, 2011

Inflation is affecting the cost of healthcare everywhere in the world – not sure what that has to do with an article about the relative costs of healthcare.
If people weren’t so agenda driven (government control of health care at any cost) they might stop gazing over the pond and instead start focusing on what could be done in a uniquely American way to control costs whilst improving care. Government involvement is necessary, but the unholy union that results from the government purchasing private insurance for its citizens will never, never, result in lower cost nor improved outcomes compared to the other options. These options go undiscussed in public because of our agenda driven political system and the partisans that support it.

Guest
Dec 1, 2011

Snark on my part, clearly. Sorry… a little bit.

Help me understand what “government purchasing private insurance for its citizens” means.
Would that be Medicare? Medicaid? VA clinics? Tri-care? Community clinics? SCHIP?

I really don’t get this “government control of healthcare” meme. The only government health care I know about is the VA and the various medical support systems of the military services. I was an Army Medical Corpsman many years ago and worked in a totally government owned and operated environment which looked pretty good to me at the time. I even had my wisdom teeth extracted at government expense by a very competent oral surgeon in a field hospital in Korea. Aside from that I don’t know of any other government controlled healthcare.

The rest of the above list are arrangements by which government tax money is disbursed to the private sector. Is that what is meant by “government control”?

I’m all in favor of other options, but if dental care and cosmetic surgery (they don’t get a lot of tax money) are illustrative that is nothing but means testing in reverse, disallowing access for those unable to afford it. I can’t think of any medical practices seeking to drum up business by offering more competitive prices like retailers or auto dealers.

I’m not just looking across a pond. I’m looking at two oceans and a Northern border and know personally of individuals who have gone in all three directions to get medical care that they could not afford in the US. And they weren’t getting any special deals from a family member. They were accessing systems that didn’t have them going into debt for the work they had done. (Thankfully they weren’t life-threatening emergencies.)

Guest
Dr. Mike
Dec 1, 2011

“Help me understand what “government purchasing private insurance for its citizens” means” PPACA, Medicare advantage, Medicare part D

I was an Air Force physician for 7 years, I thought we provided excellent care overall. (The medical corpsmen and women were exceptional as well – I thank your for your service)

My strongly held view is that our government, in its present form, is incapable of expanding upon its involvment in health care without bowing to corporate (private sector) pressures. The three entities I mentioned above are all examples of this.
I have patients who are not getting needed care because of our country’s lack of affordable health care. But the answer is not to purchase insurance on their behalf. That is not what you see when you look “at two oceans and a Northern border”.
I am very much in favor of a VA-like system for inpatient care (running in parallel with a private system), and a means tested Medicare-like system for outpatient care (again with a parallel private system). Medicaid should cease to exist – it is too expensive. Medicare should be reformed to include finncial incentives and disincentives to PATIENTS, not just providers. One’s benefit from Medicare should again be means based, and those who are able should be allowed to enjoy the advantages of an HSA and/or to purchase private insurance. Medicare should experiment with inovative programs like funding (partially or fully) HSA’s for healthy individuals and giving them more control over what they can choose to spend their health care dollars on.
All care in every system in every country is rationed. There are no exceptions. We choose to ration by providing essentially unlimited to care to a subset of the population while ignoring millions. To expand this unlimited care to the entire population is simply mathmatically impossible. If we are going to ration care (and we must) I believe that those who choose not to take care of themselves should have to suffer at least some of this rationing in proportion to their unwillingness to look after their own health.

Guest

Dr. Mike, I don’t understand how the HSA concept would work with Medicare which has no deductibles and does pay for everything already.

Guest
Nate Ogden
Dec 2, 2011

? Margalit Medicare has deductibles and pays roughly 80% of everything else. Deductible is indexed.

Guest

Well, yes but it’s like $150 dollars or so, isn’t it? Or maybe Dr. Mike was talking about the Part A deductibles. I forgot about those. My mistake.

Guest
Dr. Mike
Dec 2, 2011

I was referring to Outpatient only. An HSA is a money bag. Anyone can put money in (i.e you, me, medicare…), but the holder of the bag gets to take it out. The idea is to connect the patient with the cost of care – the HSA concept does this. If the incentive is in place (say 15% of the HSA’s year end balance given as a tax credit) the patient will be more likely to negotiate on price or to ask the doc, “Do I really need that MRI?”

Guest
Nate Ogden
Dec 2, 2011

Its not even necessary they question if they need the MRI all we need them to ask is;

Doc instead of getting a $2400 MRI outpatient at the hospital can I go across the street to the nice new building and get a $600 MRI from the free standing imagining center?

The left will instinctivly bash HSAs as only being effective when they deny care but we don’t need to reduce care we just need to consume it smarter. Granted it helps to also reduce but there are billions that can easily be saved with a little commom sense.

Guest
steve
Dec 1, 2011

There is so much spin here I am dizzy. Yes, we have a lower number of doctors. How does this translate into numbers of procedures, which is a large part of what is really driving costs? John knows, but he chooses to use the less pertinent number. Next, this is bizarre.

“As the second table shows, we replace more knees per capita than any other country and it’s hard to believe that any of these are unnecessary procedures.”

Hard to believe? The 90 y/o demented patients getting total knees really need them? The end stage CHF or COPD pt who is not going to walk anyway? Economists need to leave the office and go to a hospital.

Just to briefly address the first half of the argument, we know that government routinely pays less private insurers. You seem to be implying that markets, if they were the sole determinant, would set fees closer to private rates, ie, medicine would cost more. Unless, and this is a big unless, you are suggesting we only get real market prices when patients negotiate individually for prices. This may work for car purchases, but since we have a lot of docs here, I think we can imagine the practical, time consuming effects of having to negotiate the fee for each procedure. I dont see how you make health care work for most of us w/o an insurance mechanism.

Steve

Guest
rbaer
Dec 1, 2011

I need to do a little more thinking about that post, but the obvious conclusion to be drawn from having fewer docs and medical services and paying more in comparison to other countries is that US doctors are greatly overpaid (which I believe is true for a subset).

The more likely explanation for fewer services per capita and poor collective outcomes are that some insured utilize more services (which often results in wasteful spending/overutilization – this is just a fact for any critical observer and also supported by the medical literature), while there are many patients who have poor access and underutilize.

And then there is the fact that it is wrong to just count docs, RNs (did they count supportive staff? US hospital care tends to be intensive and there are few RNs and a rather high number of support staff) and hospital beds: for true opportunity costs, you have to count outpatient surgical facilities and clinics, as well as the administrative waterhead of US medicine (billing staff, administrative staff, discharge planner, inside and outside medical facilities). No reasonable individual would deny that an extraordinary amount of resources – money and manhours – is spent on US medical care and its bureaucracy.

Guest
steve
Dec 1, 2011

“The more likely explanation for fewer services per capita”

John emphasized that we have fewer physicians. If you read the chart, you will see that we are near the top for services per capita.

Steve

Guest
rbaer
Dec 1, 2011

Goodman wrote: “We’re not just a little bit lower. We are among the lowest in the developed world. In fact, about the only area where we “spend” more is on technology (MRI and CT scans, for example), as is reflected in the second table.” The problem is that these services are just selected snapshots of total healthcare spending and that in the US, services are to a large extent shifted to the outpatient sector (as I indicated and Millenson further below). But that was not Mr Goodman’s emphasis.

As a side note, the statistical anlysis bringing the US to the top of life expectancy by removing trauma etc. (ohsfeldt + schneider) has been debunked by the OECD itself, as indicated here:
http://blogs.wsj.com/health/2009/08/25/violence-traffic-accidents-and-us-life-expectancy/

Guest
Dec 1, 2011

Very intriguing posting! i would call it the best I’ve seen on this site (including my own, which given the size of my ego is quite a compliment). This doesn’t mean I agree with it all, just that it provokes a great deal of thought and follow up.

To begin with, I have noticed the same thing in my travels. For instance, post-acute home-based case managment simply doesn’t exist (as of my last trip) in the UK, so that their hospital stays were much longer than ours.

Here are some questions that one could use to validate (or not) the conclusions:

(1) It would seem logical that markets with very dominant payors (like Pittsburgh) would then have lowr unit costs. Is this the case?

(2) Some European countries, like Holland and (I think) Switzerland hae market-based systems. Does that mean they have higher unit costs?

(3) Drugs are cheaper in Europe than here. Do they use more of them?

PS One math question: Can you check that #19-to-#1 thing absent non-natural deaths? Our fatal accident and violent crime death rates have been falling for years, with no impact on life expectancy.

Guest
Nate Ogden
Dec 2, 2011

Pittsburgh has a dominate payor but a more dominate provider. It doesn’t matter how large the payor is if UPMC owns all the hospitals. Highmarks move into the hospital biz could make things interesting, or make UPMC the new dominate payor.

Guest
rbaer
Dec 2, 2011
Guest
Dec 1, 2011

It’s a nifty argument, kind of an end run around the obvious fact that we spend more dollars per person, greater percentage of GDP, not only than other nations do, but than we would be expected to given our greater wealth. I do understand that one can fish around for regression models (and years for your data) that manage to make it look like we don’t spend that much more than expected—and I understand that regression models don’t deal well with extreme outliers. Yet to my eyes it remains clear that we are an extreme outlier on costs.

I am wary of an “opportunity cost” argument as a way of comparing systems. One gets very deep in the weeds very quickly with assumptions about the relative value of what else one could do with the money but somehow chose not to do. It’s much clearer to simply note that we do spend a lot more.

And what do we get for it? Fewer doctor visits, hospital discharges, and so forth — but more technology. The picture here is obscured by another obvious fact: All those other systems have more or less universal coverage. A substantial portion of our population is seriously restricting their use of doctor visits and hospitalizations because they can’t afford them. I wonder how those figures would look if they were comparing apples to apples, that is, the use of resources on people who had medical coverage to pay for them.

Guest
Nate Ogden
Dec 2, 2011

” A substantial portion of our population is seriously restricting their use of doctor visits and hospitalizations because they can’t afford them.”

This is not even close to true. Most of our uninsured are so becuase they don’t need care, see the 14+ million eligible for Medicaid that don’t bother to sign up, if they needed care they could go to the hospital and be signed up at the same time they are treated.

We only have a few million people not receiving the care they need.

Guest
Dec 2, 2011

“Most of our uninsured are so because they don’t need care”
__

I’m a safe driver. Why should I waste my money on auto insurance?

Guest
Nate Ogden
Dec 2, 2011

you only need to carry liability unless you have a loan in which case your lendor requires you be able to pay. Getting a little lasy with your arguments.

Guest
Dec 2, 2011

I knew you would take the bait, and miss the point.

And, who is “lasy”?

Guest
Nate Ogden
Dec 2, 2011

no one says nothing as well as you Bobby

Guest
Dec 2, 2011

“you only need to carry liability”
__

So, you forego health insurance because you “don’t need it” in your view. Then, having guessed wrong, you have a life-threatening acute medical event (take your pick).

See 42 USC § 1395dd

You’re gonna argue to me that society has no “liability”?

Never let the legal facts interfere with your otherwise superior all-knowing acumen.

Guest
Dec 1, 2011

“Indeed, the reverse may be true. We may be spending less and getting more.”
__

Two economists are standing at the bottom of a deep hole.

Economist 1: “We’re TRAPPED! Oh, no! How will we ever get out?”

Economist 2: “Not to worry. First, assume a ladder.”

Gild on enough unprovable abstract assumptions and you can rather quickly “prove” that we have the best health care system in the world at the lowest possible cost.

Guest

Boy, that was fun. Now, aside the roller coaster and go look at a completely different analysis by the McKinsey Global Institute in Dec. 2008. (See: http://www.mckinsey.com/Insights/MGI/Research/Americas/Accounting_for_the_cost_of_US_health_care) I thought it was one of the more innovative analyses I’ve seen.

In summary: “Of the $2.1 trillion the United States spends on health care, nearly $650 billion is above expected, even when adjusting for the relative wealth of the US economy.

Outpatient care, which includes same-day hospital visits and is by far the largest and fastest-growing part of the US health system, accounts for $436 billion, or two-thirds of spending above expected. Fueling this growth are a number of supply- and demand-related factors, including (1) provider capacity growth in response to high outpatient margins; (2) the judgment-based nature of physician care; (3) technological innovation that drives prices higher rather than lower; (4) demand growth that appears to be due to greater availability of supply; and (5) relatively price-insensitive patients with limited out-of-pocket costs.”

Oh: and there are statistics which are non-political. Just because The Washington Post/Fox News reports the temperature is 75 degrees doesn’t mean it’s really snowing and sunscreen is a liberal/conservative plot. Even if you earn a living being ideological. :-)

Guest
Dec 1, 2011

“[T]here are statistics which are non-political. Just because The Washington Post/Fox News reports the temperature is 75 degrees doesn’t mean it’s really snowing and sunscreen is a liberal/conservative plot. Even if you earn a living being ideological.”
___

OK, that’s going on my REC blog “Quotes” column.

Guest

In those other OECD countries with socialized health care, patients are equally, if not more so, insensitive to price. Since there are more doctors and more beds, etc., it seems that the greater availability of supply is somehow not driving up demand. In many of those countries, technology is keeping up rather nicely with the US and physician care is also mostly judgement-based. Which leaves us with the margins, and the all around profit incentive unique to the U.S., and profit does exactly what profit is supposed to do – drum up businesses and grow the industry.

Guest
Dec 1, 2011

I am a chiropractor in St George UT, and I do what I can to keep the costs low. One thing that gets me so irked is hearing stories of how drug reps are buying lunch every day for clinic staff, just to get access to the MD’s. We all end up paying for those lunches in the form of higher medication costs. I know this happens. My wife works for a cardiologist and they have catered lunch at least 4 days a week.

Guest
Dec 1, 2011

Do we really spend more and get less?

Well that would depend if the incomes of scholars at Dallas based right wing think tanks and Philadelphia based business school are counted as health care expenditures. But please dont ask about spending on San Francisco-based conferences.

Otherwise the answer is yes.

Guest
Jonathan H
Dec 2, 2011

John: “One way to pay doctors is to pay market prices — whatever fees are necessary in order to induce them to voluntarily provide medical services”

That paraphrase is only true in a competitive market. When some players have market power this is no longer true. No one doubts that pharma and large provider systems/groups have market power. So your statement is false. Providers and pharma would continue to supply services if they were paid less relative to GDP.

Guest
Dec 2, 2011

> Most of our uninsured are so because they don’t need care, see the 14+ million eligible for Medicaid that don’t bother to sign up, if they needed care they could go to the hospital and be signed up at the same time they are treated.

How many of those aren’t signed up because they don’t *think* they need care, don’t know about their diabetes or high blood pressure until they are wheeled into the ER on a gurney. How many don’t sign up because they have heard how difficult it is to get proper doctor’s care in their area on Medicaid? How many are undocumented aliens who are afraid to try to sign up? The lack of proper primary care for the uninsured is one of the factors driving our enormous chronic disease cost in this country.

Guest
Nate Ogden
Dec 2, 2011

seeing as how illegal aliens are not suppose to be eligibile for Medicaid why would they be signing up?

How does adding tens of millions of more people to Medicaid improve the quality of care from Medicaid?

Primary Care is a very small factor, diet, exercise, lifestyle are the major factors, you don’t need a doctor at $60 a visit to tell you sitting on your ass eating fast food every day is bad for you.

Guest
Dec 2, 2011

> seeing as how illegal aliens are not suppose to be eligibile for Medicaid why would they be signing up?

Not saying they should/could/would. But when I see figures about the millions not signing up for Medicaid, I wonder who exactly those figures are counting.

> How does adding tens of millions of more people to Medicaid improve the quality of care from Medicaid?

No one ever said it would. But the fact that the quality of care is so poor and so hard to find at all is one likely reason that there are people who don’t sign up for it – it’s just not worth the incredible hassle for them.

> Primary Care is a very small factor, diet, exercise, lifestyle are the major factors, you don’t need a doctor at $60 a visit to tell you sitting on your ass eating fast food every day is bad for you.

You know, you can have all the opinions you want, but we actually know what effect good, smart, engaging primary care has on people of whatever socioeconomic level. We have the data. When a population gets good access not just to primary care, but to a medical home that reaches out to them, calls them up, gets them in for a physical, gives good preventive care, is available for questions, you actually see a marked, measurable improvement in health status, and a drop in costs – less hospital costs, fewer ER visits, everything expensive.

One big way to cut healthcare costs in this country is to provide better, smarter, earlier, more engaged primary care to everyone, no matter their insurance status or their socioeconomic level. It’s not just more humane, it’s cheaper.

Guest
Dec 2, 2011

Yep.

“Hot Spotters”

Guest
Dr. Mike
Dec 2, 2011

“One big way to cut healthcare costs in this country is to provide better, smarter, earlier, more engaged primary care to everyone, no matter their insurance status or their socioeconomic level. It’s not just more humane, it’s cheaper.”

Agree 100%. But we do have to pay for it, unfortunately. But making what you describe more affordable to us as a society fortunately has the added benefit of making it better. If you give BOTH the patient and the provider incentives, financial and otherwise, to use the precious healthcare resources wisely, you are more likely to succeed, especially if you manage to “align their incentives.” I feel that if those who desire what you describe were more willing to accept and even promote free-market type incentives as part of such a reform, that you might have more greater success in convincing a majority to move in this direction.

Guest
Nate Ogden
Dec 2, 2011

The disengenous 50 million uninsured does include illegal aliens, the 14 million eligibile for medicaid that don’t enroll does not

Remember there are only around 5 million americans that truly can’t get insurance.

If we assigned a person physician to every single person to follow them around and give them advise on every decision we would have amazing outcomes. Obviously that is not affordable. Neither is outsourcing personal responsibility to a medical home. To solve the problem individuals need to stop being the problem, and not with billions in coaching and bribes.

Cheaper is relative and does not mean affordable.

Guest
Dec 2, 2011

> there are only around 5 million americans that truly can’t get insurance.

Depends on your definition of “can’t,” along with “for how much” and “for what.”

> If we assigned a person physician to every single person to follow them around and give them advise on every decision we would have amazing outcomes. Obviously that is not affordable.

Wrong. We have the data. The Vermont Blueprint’s actual extra costs are $17 per person per year, and result in a 12% overall reduction in healthcare costs for the whole covered population – Medicare, private insured, whatever. Same percentage with the Atlantic City Special Care Center, cited in the “hotspotters” article – a 25% reduction on the costs of the top 5% of users (who typically consume 50% of the costs) – employed, insured people. Alaska Natives Healthcare Service – huge reductions in utilizations, with big rise in health markers and patient satisfaction. Orriant’s clients, with individual companies experiencing a 7% drop in costs over a time when everyone else’s costs went up 44% – and a broad range of health markers went steadily up.

> Cheaper is relative and does not mean affordable.

“Affordable?” In these examples, the cost to the payers is less than zero. That sounds more than affordable to me. It sounds compelling. Now that we have the data, for any organization that has to pay the healthcare costs of any population, not providing better, earlier, more engaged, smarter care for that population is coming to look like a manifestly stupid business decision.