Why the US health care expenditures are so high (it’s not what you think)

I recently discovered this amazing post on Random Critical Analysis, which argues very convincingly that, despite a widespread belief to the contrary, the US doesn’t actually spend significantly more on health care than other developed countries once you take into account the fact that it’s a lot richer. Here is the conclusion of the post:

Total per capita health care spending increases as wealth increases because people actually demand more goods and services (volume) per capita and because it is relatively labor intensive sector that does not enjoy the productivity gains found in some other sectors of the economy, i.e., overall costs increase through both volume and price together (volume * price). GDP per capita is a relatively weak measure for these purposes and those few other high GDP countries happen to be much more export dependent (which does not independently predict significant increases in expenditures). If you use a better measure like Actual Individual Consumption (AIC) or run multiple regression analysis on GDP expenditure categories most of the apparent excess health care spending shrinks quite dramatically.

 

Additional analysis of several major claims here (e.g., high prices due to limited market power of payers, high physician incomes, etc) show that these arguments suffer from similar issues. The best available evidence show that across multiple measures our healthcare labor costs and overall apples-to-apples price levels are generally very much inline with our material standard of living.  US total per capita costs are probably somewhat more than expected, but this appears to be driven through higher volume (~100% more than EU28 average according to PPP study estimates), though even this is significantly, if not quite entirely, explained by our higher material standards of living.

 

Now, to be clear, my position is not that we ought to be spending as much as we spend.  My position is that the issues we face are very similar to the issues faced in Europe and other prosperous countries (and are generally similar to patterns many decades earlier). They are largely differences in degree, not kind. Our large apparent cost differences mostly originate from our significantly higher material standard of living. The long term increases found in the United States and other developed countries are generally a product of ever increasing material living conditions and varying levels of productivity in different economic sectors (healthcare being labor intensive and relatively high skilled at that). Despite the fact that all developed countries allocate a large and increasing share of their consumption expenditures on health care these these richer countries, including the United States, still spend more on other forms of consumption.

 

Reducing overall health care expenditures, if that is really our top priority, involves choices.  Merely setting up single payer (or otherwise blindly aping them) is unlikely to produce large cost savings and, even if we have the will and ability to do it right, those cost savings are not “free”.  Those genuine and substantial savings (i.e., not that which is primarily the result of substantially less wealth) are not inevitable outcomes of those systems that merely come from some poorly specified efficiency improvements. They involve tradeoffs, many of them hard. Though I would be the first to argue that health care is subject to rapidly diminishing returns vis-a-vis life expectancy or mortality rates on (real) increases in expenditure and that some of this is of questionable subjective value, it is also quite clear that people actually want to consume more health care and do not much like being told “no.” Likewise, cost containment through price reduction has consequences as the health care market does not operate in a vacuum (e.g., slash physician reimbursement/effective income relative to other skilled professionals and the bright people will generally start to avoid it; reduce contracted prices for pharmaceuticals will reduce market incentives for R&D->less new drug development, etc).

 

Those systems that appear to actually generate cost savings, like the UK’s NHS, actually do a great deal more than other countries, especially the United States, to contain costs by rationing care and other cost containment strategies (and I have a hard time imaging stuff like this flying here when ~40% of the population would be excluded). There is much less low hanging fruit than people imagine, even less so at a political level when people can actually express their preferences at the voting booth and various other interest groups (providers, hospitals, etc) can influence the process.

 

More generally, it is not clear to me why we should want to specifically and target healthcare for broad cost containment over other expenditures we collectively make.   (What else should we be spending our resources on???) A significant and growing fraction of these expenditures have little to do with increasing life expectancy (e.g., luxury, convenience, quality of life/subjective lifestyle/risk decisions, etc), so insisting that we judge it strictly in these terms strikes me as myopic. So long as there are reasonable cost effective options for more basic (proven) healthcare and so long as the government’s share of expenditures are not breaking our budgets I see little need for the government to intervene further in the affairs of the rest of the health care market (note: the fact that volume, not prices, are most likely driving these incremental differences has some bearing on this issue….). Government should not create economic distortions that encourage more expenditures through tax policy (e.g., taxing healthcare spending differently, save perhaps basic coverage), mandating ever broader coverage, and so on either though.

You should definitely read the whole post, which is very detailed, with a lot of graphs and fascinating statistical analyses.

Before I read this post, I had been puzzled by the fact that health care expenditure was so high in the US for years, but was never able to find a satisfactory explanation. I’m now convinced that, despite what everybody says and what I used to think, the US is not a significant outlier on health care expenditures. It’s just that it’s a lot richer than other developed countries. This is something that we tend to forget, because past a certain level of income, differences in material standards of living become less visible. When I’m walking in the streets in France, I don’t really feel that people are less rich than in the US, but they are. As it turns out, when you factor that in, the level of spending on health care in the US is no longer surprising. One conclusion of this analysis that I find particularly interesting is that, despite what people think, what explains the fact that the US spends so much on health care relative to other developed countries is not so much the price of health care as much as the volume that is consumed. In fact, when you control for its superior material standard of living, it seems that the price of health care in the US is actually lower than in other developed countries.

This means that, contrary to what many people on the left think, you probably couldn’t significantly reduce health care expenditure in the US by switching to a single-payer system. It may also mean that conservatives overestimate how much a consumer-driven health care system, where third-party insurance mostly serves as protection against catastrophic financial loss, could reduce costs, although this is less clear because most other developed countries also lack such a system. But it doesn’t mean that everything is fine and that no reforms are needed. Indeed, although health care prices are not particularly high once you control for the fact that consumption per capita is much higher in the US, they are still much higher than in other developed countries, because consumption per capita is much higher in the US. But inequality is also much higher, which means that a lot of people in the US have a material standard of living comparable to that of poor people in other developed countries, except that for them health care is significantly more expensive. This means that subsidies for low-income people, so that they can afford health care, are probably even more important in the US than in other developed countries. (But it doesn’t mean that a single-payer system like Medicaid is necessarily the form this should take.)