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