Why Does U.S. Health Care Cost So Much? (Part I)
By Uwe E. Reinhardt
Uwe E. Reinhardt is an economist at Princeton.
The graph 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.
Source: Uwe Reinhardt
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. The dark line in the graph is a so-called regression equation (whose precise mathematical form is shown in the upper left corner).
That line tells us something important about the relationship between a country’s wealth and its health care 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.
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