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Researchers and policy-makers debate about the quality of the U.S. health care system relative to other countries, but there is no argument about its relative cost: U.S. health care is the most expensive in the world. We spend significantly more of our national income on health care than any other country, and this has been true since the 1970s. [See Figure 1.] Taxpayer-funded government health programs are busting the federal budget, and the retiring baby boom generation will make the problem worse.[i],[ii]
Figure 1. Annual National Health Expenditures Per Capita (US $PPP)[iii]
People have many theories about why U.S. health care costs are so high, including a number of misconceptions – e.g.:
- We spend more because we’re a wealthy country. While wealthy countries clearly spend more of their GDP on healthcare, our GDP per capita is actually lower than several European countries that spend less on health care than we do.
- We over-utilize clinical services. Table 1 shows how the U.S. compares with other OECD countries in several measures of health care utilization. While we are on the high end, we are the largest utilizers in only one category – angioplasty procedures. [iv]
Table 1. Clinical Assets and Utilization, U.S. vs. OECD Countries[v]
- We over-invest in medical technology. Our country’s appetite for new medical technology is large, but we’re not a major outlier. For example, we have more MRIs and CT scanners per capita than the OECD median, but Japan has 50% more MRIs and 3 times as many CT Scanners per capita as we do. If our utilization of MRI and CT scans were reduced to the OECD median (despite our higher-than-median GDP per capita), we would cut health care costs by less than 1%.[vi]
- We spend too much on end-of-life care. Comparative statistics on end-of-life care are hard to find, but the evidence that exists suggests that most developed countries spend considerable resources on end-of-life care. The Economist ranked the U.S. in the upper third of advanced economies on “Quality of Death,” a measure of access to lower-cost end-of-life care such as hospice and palliative care. [vii]
- The fragmentation of our health care sector limits economies of scale and raises cost. While our system is more fragmented than single-payer systems, it is comprised of very large companies like CVS Health (which merged with Aetna last year), UnitedHealthcare, Anthem, Kaiser Permanente, HCA, and Providence St. Joseph Health that can achieve substantial economies of scale internally. With over $190B in revenue in 2018, CVS Health is actually larger than Britain’s National Health Service (~ $160B in expenditures in 2017/18). Our complex contracting environment does raise costs [see below], but not enough to explain our high cost position.
- Many health care markets are too concentrated to be competitive. This is the flip side of the fragmentation argument. While there is considerable evidence that high provider concentration raises costs,[viii] this effect can’t explain much of our cost problem. As the Justice Department and FTC said in their 1996 Statement of Antitrust Enforcement in Health Care, “Most hospital mergers and acquisitions do not present competitive concerns.”[ix]
As Anderson, Reinhardt, Hussey & Petrosyan wrote in 2003, the proximate cause of high U.S. health care costs is high factor prices.[x] Salaries for doctors and nurses are high; drug and device costs are high; supply costs are high; technology costs are high; etc. But, why are factor prices in the U.S. so high? There are several root causes:
- Government subsidies for private health insurance. The U.S. has subsidized healthcare through tax-advantaged employer-sponsored health insurance since World War II.[xi],[xii] Health insurance is inherently inflationary, and subsidized health insurance is more so. Separating payments from benefits inevitably creates moral hazard – an incentive to overutilize services once you have bought insurance. Insurers try to control this through deductibles, co-pays, and direct controls (e.g., pre-authorizations), but none of these mechanisms is perfect. High-deductible health plans are less susceptible to moral hazard than “first-dollar” plans, but they also increase financial risk for low-income members.
- Ubiquitous, expensive, and overlapping government programs, including Medicare, Medicaid, CHIP, “safety net” programs, the VHA and BIA systems, and other programs totaling almost $1.6 trillion in 2017, not including federally sponsored medical research.[xiii] The true cost of these government programs to the economy is actually higher, because of the large and growing cross-subsidization of Medicare and Medicaid by private payers. As long as funding is available, government health programs can be harder to control than private insurance because of political pressures to expand benefits and lack of competitive benchmarks. In addition, the cost of government health care in the U.S. has been inflated by arcane reimbursement schemes, [xiv],[xv] direct subsidies,[xvi] improper payments (which the GAO estimated at over $75 billion in 2017[xvii]), and other types of fraud.
- Administrative inefficiencies, driven by:
- The long-term process of replacing out-of-pocket payments with private health insurance. Since 1960, the combination of private health insurance and government programs has reduced out-of-pocket spending from 56% to less than 20% of national health care expenditures.[xviii] This transition has required multiple insurers to contract with multiple providers, an expensive “many-to-many” process made more costly by consolidation and restructuring on both sides.
- Heavy-handed legal and regulatory schemes such as self-referral laws, fraud and abuse laws, certificate of need laws, overly protective scope-of-practice laws and professional standards,[xix] HIPAA regulations, health and safety regulations, etc., often from multiple jurisdictions, and all subject to frequent changes.[xx]
- Medico-legal costs, driven by our tort law system.[xxi],[xxii]
- The replacement of paper medical records with electronic health records, a necessary but expensive step to improve quality and consistency of care.[xxiii]
- Unhealthy lifestyles. While unhealthy behaviors are not unique to the U.S., we are the most obese developed country, and obesity is one of the most expensive human conditions.[xxiv],[xxv]
Price Controls in Other OECD Countries
These factors alone don’t fully explain why our health care costs are higher than in other developed countries. The invisible factor is price controls in these comparator countries. Because they committed early on to providing universal health care to all their citizens, these countries have had to impose sector-wide price controls to keep their budgets balanced. This has kept an artificial lid on salaries, wages, and prices of drugs, supplies, equipment, etc. for decades. It has also forced global suppliers (e.g., pharmaceutical manufacturers) to sell their products in these countries at a discount, relying on U.S. purchasers to cover a disproportionate share of their costs.
Norway shows what happens to government-funded health care expenditures as government resources wax and wane. Norway’s health system is 90% government-funded and government budgets are heavily dependent on tax revenues from North Sea oil reserves. Through 2013, while oil prices were rising, Norway ranked fourth behind the U.S., Switzerland, and Luxembourg in health care spending per capita and was catching up with us (as was Switzerland). Since 2014, however, as oil prices flattened, Norway’s health expenditures per capita relative to ours have dropped back. In other words, health care spending in Norway fluctuates with the price of North Sea oil. Switzerland’s per capita national health expenditures, much less dependent on oil prices, have continued to increase and are now about 80% as high as ours.[xxvi]
[i] Atlas SW, “Health Care Reform: What Now?” Presentation at Hoover Institution Spring Retreat, April, 2019.
[ii] The Medicare Hospital Trust Fund is scheduled to be insolvent by 2026, three years earlier than projected earlier – CMS, “2018 ANNUAL REPORT OF THE BOARDS OF TRUSTEES OF THE FEDERAL HOSPITAL INSURANCE AND FEDERAL SUPPLEMENTARY MEDICAL INSURANCE TRUST FUNDS,” Transmittal to U.S. Congress, June, 2018.
[iii] CMS National Health Expenditure Accounts (NHEA); CMS projections of NHE; OECD Health Division’s HealthData, 2013.
[iv] The indirect effect of excessive testing may be more costly than in other countries, since diagnosis isn’t perfect, and misdiagnosis may lead to expensive mistreatment more often. Topol E, Deep medicine: How artificial intelligence can make healthcare human again, New York: Basic Books, 2019, p. 26.
[v] OECD HealthData, 2013, op.cit.; for generic dispensing rate comparison: OECD, Health at a Glance 2013: OECD Indicators, http://dx.doi.org/10.1787/health_glance-2013-en , Table 4.11.1 and US GAO, Letter to Senator Orrin Hatch on Drug Pricing: Research on Savings from Generic Drug Use, January 31, 2012, http://www.gao.gov/assets/590/588064.pdf , Footnote 7.
[vi] D.A. Squires, “Explaining high health care spending in the United States: An international comparison of supply, utilization, prices, and quality,” New York: The Commonwealth Fund, May, 2012.
[vii] Economist Intelligence Unit, “The quality of death: Ranking end-of-life care across the world,” London: The Economist Intelligence Unit, July, 2010. http://www.eiu.com/site_info.asp?info_name=qualityofdeath_lienfoundation&page=noads
[viii] See, for example, Gaynor M and Town R, “The impact of hospital consolidation – Update,” Robert Wood Johnson Foundation: The Synthesis Project, June, 2012, https://www.rwjf.org/en/library/research/2012/06/the-impact-of-hospital-consolidation.html .
[ix] U.S. Department of Justice and the Federal Trade Commission, “Statements of antitrust enforcement policy in health care,” August, 1996, https://www.justice.gov/atr/statements-antitrust-enforcement-policy-health-care, p 8. Also see U.S. Department of Justice and the Federal Trade Commission, “Statement of Antitrust Enforcement Policy Regarding Accountable Care Organizations Participating in the Medicare Shared Savings Program,” Federal Register, 76 (209), October 28, 2011. https://www.justice.gov/sites/default/files/atr/legacy/2014/05/30/279568.pdf .
[x] Anderson GF, Reinhardt UE, Hussey PS, Petrosyan V, “It’s the prices, stupid: Why the United States is so different from other countries,” Health Affairs, 22 (3), 89-105, 2003. See also Anderson GF, Hussey PS, Petrosyan V, “It’s still the prices, stupid: Why the US spends so much on health care, and a tribute to Uwe Reinhardt,” Health Affairs, 38 (1), 87-95, 2019.
[xi] Gruber J, “The tax exclusion for employer-sponsored health insurance, NBER Working Paper 15766, February, 2010, http://www.nber.org/papers/w15766
[xii] Atlas, SW, MD, In Excellent Health: Setting the Record Straight on America’s Health Care,” Stanford, CA: Hoover Institution Press, 2011, pp. 246-7.
[xiii] CMS’ National Health Expenditure accounts and OECD.Stat database. $1.6T in government expenditures is almost as much as the total national health expenditures for Japan, Germany, France, and England combined. For people 65 years of age and older, U.S. federal, state, and local governments spent over $16,000 per capita in 2010, almost two and a half times as much as the average spent by the governments of nine other OECD countries. Anderson DG, “Root Causes of High U.S. Health Care Costs,” unpublished manuscript, 2014.
[xiv] D.M. Berwick & A.D. Hackbarth, “Eliminating waste in US health care,” JAMA, 307 (14 – April 11, 2012), pp. 1513-1516; R. Kelley, “White paper: Where can $700 billion in waste be cut annually from the U.S. healthcare system,” Report by Thomson Reuters Healthcare Analytics, October, 2009.
[xv] P.B. Ginsburg, “Controlling health care spending: Can consensus drive policy?” Center for Studying Health System Change. Robert Wood Johnson Foundation, April, 2014, http://www.rwjf.org/content/dam/farm/reports/issue_briefs/2014/rwjf412608 .
[xvi] The Hill-Burton Hospital Construction Program was enacted in 1946, extended until 1974, and then integrated into Title XVI, the Public Health Service Act. From 1946 to 1971, Hill-Burton provided over $33 billion in government subsidies for hospital construction (inflation-adjusted to 2010 $) L. Clark, M. Field, T. Koontz & V. Koontz, “The impact of Hill-Burton: An analysis of hospital bed and physician distribution in the United States, 1950-1970,” Medical Care, May, 1980, pp. 532-550.; A. P., Chung, M. Gaynor, S. Richards-Shubik, “Subsidies and structure: The lasting impact of the Hill-Burton program on the hospital industry,” Unpublished manuscript, December, 2012, http://igpa.uillinois.edu/system/files/HBCrowdOutpaper_AEAs.pdf . A number of states also have subsidy programs to insure hospital construction loans (e.g., California’s Cal-Mortgage program). State of California, Office of Statewide Health Planning & Development (“OSHPD”), Cal-Mortgage Loan Insurance program, http://www.oshpd.ca.gov/CalMort/index.html
[xvii] Government Accounting Office, “Medicare & Medicaid: CMS should assess documentation necessary to identify improper payments,” Report to Congress, March, 2019. https://www.gao.gov/assets/700/697981.pdf .
[xviii] Source: http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/NationalHealthAccountsProjected.html
[xix] E. Friedson, Professionalism reborn: Theory, prophecy, and policy, Chicago: University of Chicago Press,1994. T. Jost, “Neither public nor private; A healthcare system muddling through,” The Atlantic, May 18, 2012. http://www.theatlantic.com/health/archive/2012/05/neither-public-nor-private-a-health-care-system-muddling-through/257123/
[xx] C.J. Conover, “Health care regulation: A $169 billion hidden tax,” Cato Institute Policy Analysis No. 527, October 4, 2004, http://object.cato.org/sites/cato.org/files/pubs/pdf/pa527.pdf .
[xxi] M. M. Mello, A. Chandra, A. A. Gawande & D. M. Studdert, “National costs of the medical liability system,” Health Affairs, 29 (No. 9 – 2010), pp. 1569-1577.
[xxii] D. P. Kessler, “Evaluating the medical malpractice system and options for reform,” Journal of Economic Perspectives, 25 (2011): pp. 93-110.
[xxiii] See Tseng P, Kaplan RS, Richman BD, Shah MA, Schulman KA, “Administrative costs associated with physician billing and insurance-related activities at an academic health care system,” JAMA, 319 (7 – February 20, 2018), 691-697 and Lee VS, Blanchfield BB, “Disentangling health care billing for patients’ physical and financial health,” JAMA, 319 (7-February 20, 2018), 661-663.
[xxiv] Obesity is very expensive, costing 2-3% of global GDP, according to a McKinsey Global Institute study. Dobbs R, Sawers C, Thompson F, Manyika J, Woetzel JR, Child P, McKenna S, Spatharou A, “Overcoming obesity: An initial economic analysis,” McKinsey Global Institute; Jakarta, Indonesia: November, 2014.
[xxv] Alley DE, Lloyd J, Shardell M, “Can obesity account for cross-national differences in life-expectancy trends,” In Crimmins EM, Preston SH, Cohen B (Eds), International Differences in Mortality at Old Ages, Washington, DC: National Academies Press, 2010.
[xxvi] OECD Health Division’s HealthData, 2018. https://stats.oecd.org/index.aspx?DataSetCode=HEALTH_STAT .