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The US Health Care System – What Really Needs Fixing

Editor’s note:  This is the third in a series of articles on healthcare issues which will develop a focus on economic factors.

Introduction

Despite the complexity of the new health care legislation, the fundamental US health care problem is simple; it pays too much for what it gets. This point is documented below along with ideas on how the problem might be remedied. 

The Absence of Bang for Buck

Examine Table 1. It provides data on what OECD countries with per capita incomes of $30,000 or more pay for health care, both as a percent of GDP and on a per capita basis. The US spends far more by both measures than any other country.

And what do American citizens get for these outlays? The two most commonly used indicators of health system quality are infant mortality and life expectancy. The US has higher mortality and lower life expectancy than any of the other 15 OECD countries! So the US spends more by far than any other OECD country on health care, and gets the lowest payoff.

Table 1. – Health Care Expenditures and Outcomes, OECD Countries, 2007

   Health Expenditures  Infant Mortality  Life Expectancy
Country  % GDP  Per Capita  (deaths/1000 births)  (total population)
United States 15.7 7,285 6.7 77.9
France 11.0 3,593 3.8 80.9
Germany 10.4 3,619 3.9 80.0
Austria 10.3 3,792 3.7 80.3
Canada 10.1 3,867 5.1 80.7
Belgium 10.0 3,452 4.0 79.8
Denmark 9.7 3,540 4.0 78.4
Netherlands 9.7 3,844 4.1 80.2
Iceland 9.1 3,320 2.0 81.2
Sweden 9.1 3,349 2.5 81.0
Norway 8.9 4,791 3.1 80.5
Australia 8.5 3,353 4.2 81.4
United Kingdom 8.4 2,990 4.8 79.7
Finland 8.2 2,900 2.7 79.5
Japan 8.1 2,729 2.6 82.6
Ireland 7.5 3,361 3.1 79.7

Source: OECD Health Data.

It is true that US obesity rates are higher in the US than in any of the countries listed, and growing medical costs from the US overweight/obesity epidemic are soaring.[1] But this health problem does not explain the differences between what the US pays and what it gets in return relative to other countries.

Table 2 provides “bang for buck” measures. I have converted child mortality to child survival so that a bigger positive number is good. I have then divided the child survival and life expectancy indicators by per capita health expenses. The resulting indicators are proxies for the efficiency of each country’s health care system.  

Table 2 Health Care Efficiency Indicators

  Efficiency  
  Child Life % Public
Country Survival Expectancy Funding
Japan 0.3655 0.0303 81.9
Finland 0.3439 0.0274 74.5
United Kingdom 0.3328 0.0267 82.0
Iceland 0.3006 0.0245 82.5
Sweden 0.2979 0.0242 81.7
Australia 0.2970 0.0243 67.5
Ireland 0.2966 0.0237 76.8
Belgium 0.2885 0.0231 73.5
Denmark 0.2814 0.0221 84.5
France 0.2773 0.0225 78.3
Germany 0.2752 0.0221 76.7
Austria 0.2627 0.0212 76.4
Netherlands 0.2591 0.0209 n.a.
Canada 0.2573 0.0209 70.3
Switzerland 0.2228 0.0181 59.1
Norway 0.2081 0.0168 84.1
United States 0.1363 0.0107 45.5

Source: OECD Health Data.

By these indicators, Japan is by far the most efficient deliverer of health services. Of course, other factors are at work. Maybe because the Japanese are heavy smokers (25% of Japanese adults smoke, 15% of Americans smoke), their obesity rates are extremely low (4% of the Japanese are obese, 34% of Americans are obese)[2]. Smokers die young, and that cuts down the health care bill for old people. Overall, the US is at the bottom of the list by a large margin. What can explain why the US is so “inefficient” at delivering health services?

Too Many Providers?

The final column in Table 2 shows what percent of health outlays are paid for by government.  The US is at the bottom of the list. When I analyzed the data, I found that as the government payment share increases, the efficiency indicators improve. More specifically, the government share explains approximately 45% of the variation in both efficiency measures. Political ideologues might draw the conclusion from this that “socialized medicine” is more efficient than private medicine.

I offer a different explanation. I qualify for Medicare, the largest government insurance program, and it appears to run extremely smoothly. The US has far more health care providers and health insurance companies than any other nation. This requires a tremendous amount of back-office paperwork because each provider and insurer has their own standards for what they will pay for and how much. I hypothesize that all the back-office work increases health costs significantly.

Old People

Table 3 provides information on health expenditures by age bracket. Note that the mean expenditure for people 65 and over was $9,696, much more than for any other age bracket.

Table 3. – Health Expenditures by Age, 2007

  Population Expenditure
Item (1,000) Mean (mil. US$)
Total 301,309 4,404 1,126,056
Age Bracket      
Under 5 20,181 1,978 35,533
5-17 53,727 1,478 66,911
18-44 111,042 2,754 236,455
45-64 77,665 6,138 425,121
65 and over 38,694 9,696 362,037

Source: Medical Expenditure Panel Survey 2007

It is true that infirmities increase as people get older. But it is also true that medical technology has advanced to the point where people can be kept alive in hospitals almost indefinitely. This is done at great expense, but most older Americans have health insurance that covers all hospital costs. Is hospice outmoded? Do older people really want to remained “hooked up” in hospitals forever? I doubt it.

For better quality of life as well as lower health costs, I propose that to qualify for Medicare, a person should have a living will, a health proxy, and a durable power of attorney. At the very least, people who don’t want to live indefinitely in hospitals should not have to.

Again, this requirement should result in significant cost savings.

Delegation

I live in Massachusetts and many from other states remark how fortunate you are to have such good hospitals. I smile and let it pass. But this comment misses the primary point: most health concerns do not require a doctor to diagnose. US doctors should understand this, but there is considerable reluctance within the doctor’s profession to allow initial health complaints to be dealt with by nurses or nurse practitioners. This is nonsense – having heath care clinics run by nurses with the authority to prescribe certain drugs and therapy is where all health care concerns should start. I again hypothesize that more delegation would result in considerable savings.  

The New Bill

Some talk of repealing the new US health care legislation. Indeed, the bill is complex and many of its features will not start until 2014. But some of the opposition comes from selfish people who don’t want to pay any part of the health costs of poor Americans.

Clearly, the new health bill, like the financial reform bill, is not perfect. And what could be expected? Open Secrets reports that $1 billion was spent lobbying on these bills. The result was that their special interests were incorporated in the legislation and American citizens got two bad bills.

However, the new bill has considerable positive attributes. We need to give it a chance. Table 4 provides estimates of the US government savings resulting from the new Act. 

Table 4. – US Government Savings, New Health Care Bill, 2010-2019

(bil. US$)

 Item BudgetSavings
Medicare Productivity Improvements 156.6
Medicare Advantage Payments 135.6
Community Assistance Living 70.2
Home Health Care Payment Adjustments 39.7
Medicare DHS Payments 22.1
Revisions to Medicare Improvement Fund 20.7
Independent Payment Advisory Board 15.5
Administrative Simplification 11.6
Other 25.4
Total 508.1

Source: US Congressional Budget Office

I have no idea what will be involved to implement these cost savings. But $500 billion+ is a significant savings and worth working to achieve.

Conclusions

I am an economist with little knowledge of US health care system. But from Table 1, I conclude, with no reservations, that it is horribly inefficient. It is a disgrace for a country that prides itself on efficiency in service delivery, e.g., fast food.

 In the late ‘60s, I was involved with a large hotel management company that wanted to develop a chain of hospitals up and down the Eastern seaboard. The financing was in place. But at the last minute, the doctor who had agreed to be CEO pulled out. Too bad. That initiative might have become a model for the delivery of health care services resulting in major health cost savings.

Footonotes

[1] For more on obesity, see my recent article

[2] Data on smoking and obesity come from the OECD Health Database, June 2010 version.

Related Articles

Obesity and Health Care Costs  by Elliott Morss

Health Care and Obesity:  A Global Dilemma  by Elliott Morss

Nutrition Scoring:  NuVal™ vs. ANDI – But What Info Is Really Needed by Elliott Morss

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2 Responses to The US Health Care System – What Really Needs Fixing

  1. droubal says:

    Clearly something needs to be done about the cost of health care in the US. Unfortunately the US Gov’t does not have a very good track record of doing things efficiently. There are models like Cleveland Clinic and Mayo Clinic that are much more efficient care givers than most. But congress is not interested in efficiency they are interested in campaign donations. That’s why gov’t programs are always inefficient and ineffective.
    Medicare may have been fairly successful but will need about 3 times the funding it currently has. Furthermore, a lot of costs are still left to the individual, who is pays far more than insurance companies do, for the same service.
    There is a lot of work to be done, but nobody we can trust to do it.
    Vote out all incumbents, your life may depend on it.

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