Editor’s note: This is the third in a series of articles on healthcare issues which will develop a focus on economic factors.
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)|
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. 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
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). 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.
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
|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.
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
|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|
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.
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.
 Data on smoking and obesity come from the OECD Health Database, June 2010 version.
Obesity and Health Care Costs by Elliott Morss
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