Why the U.S. spends more on health

Wealthier nations all spend more on health. However, the U.S. spends well above what would be expected, compared with its peers. McKinsey Global Institute used data from 13 industrialized nations to develop a measure it called Estimated Spending According to Wealth (ESAW). By McKinsey’s calculations, $477 billion of the $1.7 trillion the U.S. spent on health care in 2003 was in excess of what it should have spent based on its wealth. Analysts said the condition of Americans’ health did not explain the higher costs. Hospital and physician care accounted for 85 percent of the excess spending.

McKinsey said a huge driver of costs is the fact that providers are expanding capacity, in part because they can produce their own demand. This echoes ample research showing that health-care use rises when facilities expand or open, independent of population health. McKinsey also cited technological innovation that invariably delivers more expensive care, and the fact that patients are insensitive to high prices because their out-of-pocket costs are, in general, so low.

In a classic Health Affairs journal study called “It’s The Prices, Stupid: Why The United States Is So Different From Other Countries,” the researchers argued that Americans spend more on health care even though they use fewer health services than other developed nations. The difference, they said, was that the U.S. health-care providers charged higher prices.

For example, the U.S. consumes 10 percent fewer drugs per capita than other industrialized nations. However, the U.S. spends 70 percent more for drugs. The U.S. also has comparatively lower disease prevalence because it has a younger population and lower smoking rates. It also has the lowest hospital usage compared with 10 peer nations and ranks eighth out of 10 in the number of physician visits.

The reason for higher U.S. prices is that buyers lack negotiating power – or choose not to exercise it. Other nations consolidate their bargaining power either in their governments or as cooperatives. They negotiate one standard – and invariably lower – price for health services and pharmaceutical drugs. In the U.S., there is no government purchaser willing to bargain on behalf of constituents. The continuing consolidation of hospitals and physicians leaves health plans in weaker negotiating positions.

The government shies away from using its buying power. Mike Leavitt, Health and Human Services secretary under President George W. Bush, said he opposed negotiating Medicare drug prices because “it really isn’t about government negotiating drug prices. It’s a surrogate for a much larger issue, which is really government-run health care.”

During the health-reform debate, the Obama administration dropped the “public option” insurance plan, even though it would have been one of several available options on the health insurance exchanges. It also decided not to seek to negotiate lower drug prices for Medicare.

Other nations do not have a choice on whether to drive a hard bargain with health-care providers. If they spent the same portion of GDP as the United States did, the required tax burden likely would cripple their economies. The United States is not at that point, but is well on its way.

The International Federation of Health Plans surveyed 12 industrialized nations on the costs of 14 common procedures. Each nation but the U.S. reported one price. The U.S. reported a range of prices because of its fragmented negotiating landscape. The price differences were significant. The cost of delivering a baby was $2,667 in Canada, $2,147 in Germany and an average of $8,435 in the U.S. A comparable length of hospital stay cost $1,679 in Spain, $7,707 in Canada and ranged from $14,427 to $45,902 in the U.S..

Even though U.S. physicians deliver less care than doctors in other industrialized nations do, their average income is about three times greater. The ratio of physician income to that of the average U.S. employee is 5.5, compared with 1.5 in Great Britain and Sweden.

Health reform attempts to reduce the amount of care consumed, rather than attempt to control prices. It will encourage doctors and hospitals to form accountable care organizations (ACOs) and pays them a fixed sum to discourage unnecessary care. The law also funds comparative-effectiveness research in an effort to reduce less effective treatments. However, many health-policy analysts consider these  measures too weak to counteract the proliferation of expensive procedures and emerging, costly technologies.

The fragmented health-care sector is also larded with excessive administrative costs. The McKinsey Global Institute estimated that administration accounted for 21 percent of ESAW. Most of that is because of the incredibly complex U.S. private insurance system. The U.S. spends about six times more on insurance administration than other industrialized nations.

Consumers weigh in

Few health consumers blame technology and market power for rising health-care costs. Instead, they point to favored demons, real and imagined. In a HealthDay/Harris Interactive poll, 6 out of 10 blamed insurance companies and pharmaceutical firms. About half blame hospitals.

Health economists say insurance and drug-company profits account for about 2 percent of total health-care spending. A 2009 analysis of hospital finances found that the median profit margin for U.S. hospitals was zero.

More than 1 in 3 poll respondents blamed obese and overweight people. The least-cited reason: Their own excessive use of health services.