Why U.S. Health Care Is So Expensive

This month, an article in JAMA gives us some ideas of why American medical costs are so high. The authors analyzed data from the OECD (Organisation for Economic Co-operation and Development). The OECD maintains a huge database of economic information from most of the world’s developed countries. Their healthcare database is particularly useful to anyone interested in the international macroeconomics of medicine. One way of gauging the importance of an article in a medical journal is by the number of editorials that accompany it. This article has 4 accompanying editorials, about the most I’ve ever seen.

In the article, the authors compared the United States to 10 peer, high income countries: the United Kingdom, Canada, Germany, Australia, Japan, Sweden, France, Denmark, the Netherlands, and Switzerland. The U.S. is unique in many ways. For example, we have the largest total population, our total land area is second only to Canada, and we have the lowest percentage of the population over age 65. Nevertheless, most people would consider the citizens of these countries to be more socioeconomically similar to Americans than most other countries.

Not surprisingly, the results show that Americans spend far more on healthcare than other countries. 17.8% of our GDP goes toward health as opposed to a mean of 11.5% of GDP in peer countries. We spend $9,403 per person whereas the mean of the other countries is only $5,410 per person (in U.S. dollars). When you drill down, it turns out that we do not spend an excessive amount on inpatient care or long-term care, in fact, for both of these, we are the second lowest of the peer countries – we spend 19% of healthcare dollars on inpatient care (compared to a mean of 26%) and 5% on long-term care (compared to a mean of 16%). Where we spend disproportionately is in outpatient care at 42% of healthcare expenditures (compared to a mean of 31%) and administrative expenses at 8% of healthcare expenditures (compared to a mean of 3%). Another way that the United States differs significantly is in the percentage of the population that has healthcare coverage/insurance: in the U.S., 90% of the population is covered but all of the other peer countries have > 99.8% of the population covered. All of the peer countries have some form of national health insurance – the U.S. is the only country that is primarily composed of private, employer-based insurance plans. As a result, we have the highest “horizontal inequity index”, a measure of the degree to which a person’s wealth determines whether or not they have physician visits.

Unfortunately, all of that expense does not get us much. We have the lowest life expectancy at 78.8 years compared to a mean of the peer countries at 81.7 year. Our maternal mortality, infant mortality, and neonatal mortality are the highest of all peer countries. Interestingly, when it comes to determinants of health, we come in second to the lowest in prevalence of smoking at 11.4% of the population (peer countries mean = 16.6%) and slightly below average for prevalence of alcohol consumption at 8.8 L per person (peer countries mean = 9.1 L per person). Where we really stand out in determinants of health is in obesity: 70.1% of Americans are obese or overweight compared to a mean of 55.6% of the population in peer countries. No other peer country is even close to the U.S. in the percentage of the population that is obese.

In terms of our workforce, the U.S. has relatively fewer physicians per 1,000 population at 2.6 compared to the peer countries mean of 3.3. The percentage of our physicians who are primary care physicians is average (43% compared to a peer country mean of 43%). This means that the percentage of our physicians who are specialists is also average (57% versus a peer country mean of 57%). We also have an average number of nurses per 1,000 population at 11.1.

However, our physicians make more money than any other peer country: our primary care physicians make $218,173 versus a peer country mean of $133,723; our specialists make $316,000 versus a peer country mean of $182,657. Nurses also make more money in the U.S. at $74,160 versus a peer country mean of $51,795.

In terms of equipment, the U.S. has fewer hospital beds per capita (2.8 per 1,000 population versus a peer country mean of 4.8 per 1,000 population) and fewer long-term care beds per capita (38.8 per 1,000 population over age 65 versus a mean of 54.2 per 1,000 population over age 65 in peer countries). However, we have considerably more MRI machines (38.1 per million population versus a mean of 22 per million population in peer countries) and CT scanners (41 per million population versus a mean of 36.5 per million population in peer countries). The net result of this is that we do more MRIs per 1,000 population (118 versus a mean of 82 in peer countries) and CT scans per 1,000 population (245 versus a mean of 151 in peer countries).

When examining resource utilization, our admissions per capita for common diseases such as myocardial infarction, psychiatric disease, pneumonia, and COPD are average. But, we do considerably more knee replacements, Cesarean sections, coronary artery bypass surgeries, coronary angioplasties, and cataract surgeries than peer countries. Our hospitalization rates for diabetes and asthma are very high. Our hospital length of stay tends to be slightly lower than average for common conditions such as normal delivery and myocardial infarction; in fact our all-cause hospital length of stay is only about 5.5 days versus a mean of about 7.5 days in peer countries. Our wait time to see a primary care physician or specialist is about average. However, we are more likely to skip getting a consultation because of cost than any other country (22.8% versus a peer country mean of 9.4%).

We really stand out in pharmaceutical costs. Americans spend $1,443 per person versus a mean of $749 per person in peer countries. For common medications such as Crestor, Lantus, Advair, and Humira, Americans spend far more than any other country – generally twice as much as the next most expensive countries (Canada and Germany).

So, what is the bottom line?

  1. We pay too much for medications. The American economy is built on the principle of the free market – competition encourages innovation and keeps costs down. So one would think that with a system of multiple private insurance companies each negotiating among pharmaceutical companies for preferred “on-formulary” drugs, that the cost would be lower. The problem is that when it comes to drugs, it is an international market, not a national market. Countries with a centralized health system can negotiate with pharmaceutical companies with the purchase power of the entire populace of the country and this makes them very powerful negotiators. It is very much like these other peer countries are analogous to Walmart and the various private U.S. health insurers are analogous to the tiny mom and pop general stores – Walmart is always able to negotiate a better price from its suppliers.
  2. Our administrative costs are too high. The multi-layered health financing system that has evolved in the United States is a system of multiple middlemen, each taking an administrative cut out of the healthcare dollar. Each layer in this system creates additional paperwork and bureaucratic barriers that have to be navigated by the patient and the physician. All of this adds up to cost – 8% of our GDP goes toward healthcare administrative costs whereas only 3% the GDP of peer countries goes toward these costs. When it comes to healthcare administrative costs, other countries are eating our lunch.
  3. Our physician salaries are considerably higher than other countries. But, because we have fewer physicians per capita than other peer countries, the overall cost of physicians is similar to other countries. However, if physician numbers increase, then salaries will need to come down in order to avoid overall healthcare cost inflation.
  4. Americans get more CTs and MRIs than citizens of peer countries.
  5. We do more high-margin procedures, such as knee replacements and Cesarian sections than are done in peer countries.
  6. We have enormous economic disparities in healthcare. If you are a  wealthy American, you are more likely to see a physician regularly and you can get pretty good healthcare. But if you are a poor American, your access to healthcare is much less than poor citizens of other peer countries. If we are to compete on a global market in manufacturing, service sectors, and food production, then we need to have a healthy population of workers – all workers, not just the highly paid workers. Otherwise, healthcare disparities place our country at a competitive disadvantage to other countries when it comes to production of goods and services.
  7. Lastly, we are too obese. Obesity is incredibly costly. It is a major driver of diabetes, hypertension, coronary disease, sleep apnea, and hyperlipidemia. Obese persons are more likely to wear out their knees and need need knee replacement surgery. They are more likely to get gallstones and require cholecystectomy. Obese persons are much more likely to become disabled than non-obese persons. All of this adds to additional healthcare costs.

In this post, I am not offering any solutions, just pointing to the causes of our high cost healthcare. One of the telling findings of the JAMA article is that 23% of Americans believe that we need a complete rebuild of our health system – the mean percentage of citizens of peer countries believing that a complete overhaul was necessary was only 8%. Overhauling our healthcare system will be difficult – all of the factors resulting in our high cost result in groups of people making a lot of money off of the various layers of our healthcare system and those groups of people can easily become vocal lobbyists for maintenance of the status quo. However, if we are to remain competitive in a global economy, we cannot afford to have other countries outperforming us in healthcare value.

March 19, 2018