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February 14, 2007

Why Does American Health Care Cost So Much?

The nonpartisan McKinsey Group has released a study called "Accounting for the Cost of Health Care in the United States."  The idea, as the title suggests, is to figure out, in a rigorous and methodical way, why we pay so much more than any other developed country.  To do this, McKinsey constructed the Estimated Spending According to Wealth (ESAW) index, which adjusts cross-national health spending for increases per capita earnings (you would expect, after all, that a country which makes more money would pay more for care) and creates a clean baseline for comparisons.  On this metric, we overpay to the tone of $477 billion per year, or $1,645 per capita.  The question is why.  (Note: From here on out, most numbers refer to the amount we spend above what ESAW would predict)

The very short answer is that we pay more for unites of care.  McKinsey estimates that it is not higher disease prevalence.  Differences in health account for only about $25 billion of the variation -- a drop in the bucket.  The difference really is that we pay higher doctor salaries, higher drug costs, higher operation costs, more per day in the hospital, etc, etc.  In essence, we're getting a terrible deal.

Take drugs.  The report finds that we overpay for prescription drugs by $66 billion.  If you compare brand name drugs in the US and Canada, the same drug will cost you a full 60% more here.  If you restrict that to the top selling drugs, you find we pay 230% more than anyone else.  For generics, the difference evaporates.  So on average, we overpay by 60-70% for pharmaceuticals, largely because we don't bargain down the costs just like every other country.  In essence, we're subsidizing the low drug costs for the rest of the world.  If we demanded the discounts as well, other countries would pay a bit more, but we'd pay a lot less.  This, of course, is just what the administration has been trying to prevent in their fight against allowing Medicare to bargain down prices.  They believe American consumers should continue paying for the discounts of Europeans.

Doctor's compensations are also problematic: We overpay here by $58 billion.  In other nations, specialists make 4 times the average salary.  In America, they make 6.6 times the mean.  Meanwhile, the overall profits of the system add on another $75 billion in costs.  Another $147 billion in increased spending, much of it a consequence of the fee-for-service system, wherein doctors are paid based on how many procedures they recommend and carry out.  Doctors with equity in facilities where they can co-refer cases conduct between two and eight times more tests than those without equity interests.  Just another way the profit incentive helps us out. 

And of course, there's administration, where we pay $98 billion more than anyone else, $84 billion of it in oh-so-efficient private sector.  64% of those costs come from insurer underwriting and advertising -- in other words, we're paying more than $50 billion dollars so insurers can convince us we need care and then figure out how to deny those of us who'll actually use it.  That's some added value.

Anyway, I'll close out the wonkery here, but hopefully the point is made.  We pay way too much, and get nothing for it.  We pay because most actors in the system seek profits rather than wellness, because doctors buy their homes based no the number of tests they prescribe and pharmaceutical companies don't give us discounts because they've bought Congress and insurers get us to pay for them to figure out how to deny care.  This is not a system anyone would consciously build.  It is not a system any patient would choose.  But it is a system we can change.  The report, however, also explains the danger of moving to universal care without fixing the structural perversities.  To extend coverage without changing these dynamics would add on another $77 billion of spending beyond what it should cost. 

For more on the report, see Goozner and Pearlstein.

Crossposted to Tapped

February 14, 2007 in Health Care | Permalink


I'm just wondering - I don't necessarily have an opinion - but is McKinsey really non-partisan? The company that hired Chelsea Clinton? I'm not doubting the work or the validity of the findings... just wondering about the designation...

Posted by: weboy | Feb 14, 2007 4:32:48 PM

The difference really is that we pay higher doctor salaries, higher drug costs, higher operation costs, more per day in the hospital, etc, etc. In essence, we're getting a terrible deal.

This is exactly what I have been saying while the lefties seem to want to only focus on insurance. Attack the root problem and not the symptom. A good start would be to encourage the building of lots of schools to pump out more doctors. Allowing other disciplines to practice would be helpful as well as we have with Osteopaths.
Bottom line, supply and demand for hospitals and services. Want cheaper health care? Produce more providers.

Posted by: Fred Jones | Feb 14, 2007 4:40:26 PM

McKinsey is very non-partisan. Why would hiring Chelsea change that?

Posted by: Ezra | Feb 14, 2007 4:54:45 PM

"McKinsey is very non-partisan. Why would hiring Chelsea change that?"

Once there a post yesterday about how the right likes to disagree with anything from the left out of spite, not because we are factually wrong. Well, chalk up the queston, even if the poster who asked it, as a rightward frame. Guilt by association.

Posted by: akaison | Feb 14, 2007 5:26:42 PM

Wow, I agree with Fred, we should be definitely be increasing the supply of doctors.

We also need to change the extremely screwed-up compensation system of charging per treatment administered, versus charging for making patients well. Here's just one small example from the world of breast cancer. When the surgeon resects the tumor, he or she can insert a device that that adminsters a steady dose of radiation, in order to kill any remaining cancerous cells at that site.

What European hospitals do is insert the device at the time that the surgeon removes the cancerous lump.

What American hospitals do is schedule the woman for another surgery. There is no legitimate medical reason to do this, but you do get to charge for anesthetizing and opening up the patient again.

This kind of stuff is the "dark matter" of American health care. Our system is just riddled with this kind of crapola. And these inefficiencies are all a direct and predictable result of the economic incentives we have in place.

Posted by: Evan | Feb 14, 2007 6:25:43 PM

I'd GUESS that if we explored the question of why medical providers charge so much more than seems justifiable by comparison, we'd get several other problems to unwind:

- costs of undergraduate and medical education, with the education paid for by huge loans. What do other countries do about medical education costs?

- cost of administration of provider's practices. All providers complain that they must have substantial staff just to haggle with insurers on coverage, collect bills from insurers and patients, etc. I think we know that administration adds about 14% to US medical costs versus a lower number elsewhere (and only a couple of percent for Medicare).

- proportion of providers doing specialty practice. My guess that far higher percentages of MDs/etc. are doing specialties that command higher market prices. Is this a fact?

- health care may be a place where competition increases costs, rather than prices being set by market forces (supply/demand). I suspect that specialists in particular set their prices by comparison with high-price leaders rather than low-cost competitors. When needing medical care, cost is not in the mind of the patient and they don't shop around for bargains. Since many providers are independent persons or medical groups, they really can set their own prices in many settings, subject only to what insurers will pay plus what they can get from patients. For the uninsured, they can and do set their prices well above the price for insurered patients.

My point above is that we can't just say they are greedy profit mongers and that's why our costs are higher. That may be true for some, but other forces are at work that suggest that free enterprise doesn't work well for the commodity we call health care.

I'm quite happy to let the government or some large, state-wide purchasing coop negotiate prices on my behalf because they really can negotiate and I can't.

Posted by: JimPortlandOR | Feb 14, 2007 6:39:31 PM

I'm prepared to get behind Fred if he really means it about breaking the AMA. But I wonder if he realizes that that's what he's proposing.

Posted by: NBarnes | Feb 14, 2007 6:49:13 PM

He might. Fred is a troll, and he can't see the nose on your face sometimes, but he's not an idiot. If his religious adherence to right-wing ideology doesn't get in the way, he can be very smart, and breaking the AMA is just like breaking any other union to the right -- a good thing.

I don't mind the AMA as such, but I don't like guilds, both on grounds of economic inefficiency and because they are by their nature designed to make sure certain industries serve only their membership and not society as a whole. Both left and right, to be honest, should be anti-guild.

Break the AMA's grip on the practice of medicine by breaking its guild status, but leave the AMA itself alone. That's a win for both left and right, and even for all potential and retired US doctors, who far outnumber the current ones whose incomes breaking the guild hurts.

Posted by: wcw | Feb 14, 2007 7:20:19 PM

You wanna know why health care costs are so high?

John Edwards and people like him.

Posted by: Captain Toke | Feb 14, 2007 8:00:17 PM

Okay Toke, what is the percentage of American health care costs that is due to torts?

This should be fun.

Posted by: Evan | Feb 14, 2007 8:21:54 PM

Evan, don't bait the trolls.

(Although the response to that bait should be fun indeed.)

Posted by: eriks | Feb 14, 2007 8:59:53 PM

You wanna know why health care costs are so high?

John Edwards and people like him.

Posted by: Captain Toke

LOL - you aren't linking to a Free Republic site? You don't have quotes from Democrats agreeing with Bush about what the real problem with health care is? You haven't confused an editorial with anything like evidence or research? Awww, Toke, you aren't even trying any more. It's so sad!

Oh, wait, that was just acid reflux. No, not sad at all.

Posted by: Cyrus | Feb 14, 2007 10:15:33 PM

wcw: Adopting your use of 'guild', I'd say that the AMA is entirely defined by its guild nature. Stripping the AMA of its guild-ness would almost certainly mean breaking it as an organization. I'm certainly in favor of a doctor's union in a more general sense, but since the AMA is so entirely and essentially wedded to its role as a guild, I don't know that it can be reformed.

Also, I echo Evan's question to Toke.

Posted by: NBarnes | Feb 14, 2007 11:08:49 PM

"Okay Toke, what is the percentage of American health care costs that is due to torts?"

Well, there's the torts, the unnecessary and expensive medical procedures and tests that doctors order for patients to cover their asses. The outrageous medical malpractice insurance. Student nurses have to buy a million dollar policy where I go to school.

John Edwards won a six and a half million dollar lawsuit against a doctor because he claimed that doctor caused his client's child to have cerebral palsy, a nervous disorder. The scumbag even channeled the child from the womb to the jury, the child begging to be let out. Edwards claimed if the doctor had done a C-section, the child would have been fine.

Since the seventies, C-sections are up from 6% to 26%, and a big part of that because doctors want to cover their asses. But there has been no drop in the cerebral palsy rate. He used junk science. C-sections are done to avoid lawsuits, but the procedure is more painful, more expensive because of not only the procedure but for extended hospital stay, and the procedure poses greater health risks.

That is just one lawyer and one procedure, and the expense and suffering inflicted by the millions of unnecessary C-sections has benefited no one, except John Edwards. Imagine the hundreds of thousands if not millions of lawyers like Edwards (some that I'm sure Edwards himself inspired) and all the other bogus lawsuits and all the other unnecessary tests and unnecessary medical procedures and unnessary expense and suffering.

Do you understand ripple effect?

Posted by: Captain Toke | Feb 14, 2007 11:15:51 PM

Just think of the burden Edwards alone has inflicted on our health care system.

Posted by: Captain Toke | Feb 14, 2007 11:21:50 PM

I understand misdirection because unless tort can explain the cost of pharmaceticals for the same drug in the US versus the rest of the world or the cost of getting a medical education etc, then its called a smoke screen masquerading as a real argument.

The problem with lowering the standards (which is what adding more medical schools would do is that it reduces quality). I will be happy with doing that so long as it's folks like Fred who get to go to the doctors who aren't as well trained because we wanted quantity or quality.

Posted by: akaison | Feb 14, 2007 11:22:39 PM

"(which is what adding more medical schools would do is that it reduces quality). I will be happy with doing that so long as it's folks like Fred who get to go to the doctors who aren't as well trained because we wanted quantity or quality."

I think akaison is OK with socialized medicine as long as the riff-raff go to the low paid, undertrained, cookie-cutter doctors that socialized medicine would produce.

But akaison isn't an elitist liberal.

Posted by: Captain Toke | Feb 14, 2007 11:40:13 PM

1.) I would second Captain Toke's arguments in that much of the current medical system and bureaucracy is designed to address litigation risks. This applies not only to marginally useful tests (e.g. CTs for headaches which I personally have ordered for patients unnecessarily on the sole basis that that was the current "standard of care") but also the entire placement system that hospitals are forced to employ. Our hospital Brackenridge employs a ridiculous number of people just to shift "patients" into other instituitions because we can't be seen to be blamed for a homeless individual's later runins with the law, etc.

2.) This AMA bashing puzzles me since they have essentially no power. Not only are they an ineffective lobbying group judged by physician reimbursement rates but most physicians don't belong to it. Also they have no power over postgraduate medical education (a body called ACGME runs this) or over medical schools (the AAMC sets standards for them). Perhaps people incorrectly think they are analagous to the ABA?

3.) In re postgraduate medical training (residency) --this is the real roadblock to more physicians. The govt. funds these spots and doesnt want to pay for more (along with the enormous cost of underwriting medical schools) while hospitals certainly won't do that. Most doctors in addition wouldn't be caught dead in teaching hospitals instructing medical students and residents.
The US medical system as a result is highly dependent on importing foreign medical labor and will continue to be so given these facts. Given the working conditions of long hours, extensive further educational requirements, etc., only third world physicians are willing to emigrate, a little remarked upon problem for obvious reasons.

4.) More doctors = less health care cost is a fiction. It might decrease avg. compensation but certainly not total health care costs as every study has shown due to increasing referrals, specialization and procedures. Matt Yglesias had a good posting on his blog about this a while back.

5.) Lowering doctor pay is a great idea if you want less talented people in the field. As it is, thanks to Baumol's disease, the number and quality of Harvard students (to pick one proxy for whatever its worth) going into medicine has almost certainly declined anecdotally...Logically, one could hardly doubt that decreasing compensation would lead to lower quality applicants. Given the increasing opportunity and absolute costs of a medical education in the US (10 yrs. post college and usually at least 200 thousand in assorted expenses post-college), I doubt this idea could be implemented without significant adverse effects.

Posted by: vik | Feb 14, 2007 11:40:55 PM

toke stop posting under different names. and by the way, standard reply to the crazies: provide links to reputable sources or else it will be concluded (as it should) that you are making shit up.

Posted by: akaison | Feb 14, 2007 11:53:12 PM

akaison, why don't you ask ezra if I am doing what you are accusing me of. And if you aren't up to date on this particular subject (Edward's cerebral palsy case) or stats you can easily very, even at wikopedia, then maybe you should come back to the conversation when you can write about the subject intelligently.

Posted by: Captain Toke | Feb 15, 2007 12:02:59 AM


I'm blistered

Posted by: Captain Toke | Feb 15, 2007 12:04:42 AM

I'm actually not Toke...in re above post...

1.) talk to any actual doctor...or better yet, if you are ever in Austin, I will give you a tour of the Brackenridge and you can come to your own conclusions...

2 and 3.) http://www.acgme.org/acWebsite/home/home.asp

in addition, i would ask you to particular attention to their requirements for work hours...any field where 80 hours is considered a standard work week is hardly going to attract everyone...


please google an explanation of the residency system (pay attention to avg. pay especially considering its in the 40+ grand range)--i'm too lazy to prove something that should be obvious to anyone who wants to comment on medical training in America...As to doctors' attitudes about academic medicine in teaching hospitals, again you will have to talk to real physicians and/or compare academic-private practice salaries (www.careersinmedicine.org)

4.) http://www.marginalrevolution.com/marginalrevolution/2005/08/medicare_at_wor.html

5.) Basic economic reasoning...here's an explanation of baumol's disease... http://en.wikipedia.org/wiki/Baumol's_cost_disease

Posted by: vik | Feb 15, 2007 12:09:45 AM

I apologize for the tone of the above...it comes off as a little harsher than I would wish now that I have reread it...

Posted by: vik | Feb 15, 2007 12:11:14 AM

i dont disagree with the stuff about doctor training. i just find reducing it to tort deform simple minded. it's a little like complaining about cigarette smoke in other room while the house is burning down.

Posted by: akaison | Feb 15, 2007 12:19:02 AM

It's not just tort, but tort is a hell of a lot more than cigarette smoke in a burning house, it is a huge part of the problem, and John Edwards is 'bogus medical lawsuit's poster child.

Tort isn't just the money paid out in awards. Like I said, I imagine that John Edwards alone has cost US health care unnecessary billions of dollars in unnecessary medical procedures, time, equipment, manpower, etc. And there are millions of lawyers out there like Edwards.

Posted by: Captain Toke | Feb 15, 2007 12:36:05 AM

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