Prices and US Health Spending

By January 15, 2019Commentary

For as long as I can remember people have been gnashing their teeth about health spending and health spending growth in the US and comparing us unfavorably to other developed countries.  And for as long as I have been reading research on the subject, it is apparent that the issue is the relative prices, and the growth of prices, in the US.  An article in Health Affairs reinforces this fact.   (HA Article)   Partly because they are trying to sell services, a lot of people continue to claim that there is rampant use of inappropriate services and that this is the cause of too much health spending for Americans.  While there undoubtedly is some delivery of avoidable care, I have always believed that if everyone got the exact care that they needed, not more, not less, we would probably either net out at zero or actually have more care delivered; because I suspect more people aren’t getting care that they need than the reverse.  Prices on the other hand, are clearly and demonstrably much higher in our country than elsewhere.  The Health Affairs article recapitulates developments since 2003, when Uwe Reinhardt, a near-legendary health researcher, wrote an article on the topic titled “It’s the Prices, Stupid.”

The authors replicated data sources and methods used in the original article to the extent possible.  In 2016, per capita spending in the US was $9892, 25% higher than that in Switzerland, the next highest developed country and 145% higher than the median among these countries.  Our spending growth also increased at a faster annual rate, 2.8%, than the median for other countries, 2.6%, but not by much.  One useful comparison is private versus public spending.  In 2016, public sources (primarily Medicare and Medicaid) financed 51% of health spending in the US, compared to a median 25% in the other developed countries.  Contrary to impressions one might get, a lot of health spending in other countries is private; both because the countries have difficulty affording the provision of “free” care and because people seek private sources due to dissatisfaction with public systems.  Price differentials between public and private payers in the US have grown since the original article in 2003.   In that year the difference was about 10%; in 2016 commercial payers are reimbursing at a rate 50% higher than Medicare.

Supply factors are not a reason for greater US spending.  We have fewer physicians per thousand population and fewer hospital beds, testimonies to the greater efficiency in the US.  We have actually rationalized care delivery much better than most other nations.  But the average cost of a hospital stay in the US is twice that of the developed country median.  We do tend to have more use of advanced, and often expensive, technologies like imaging machines, but the gap with other developed countries is narrowing.  What is fairly clear is that we pay our health professionals more than other countries do.  We also pay more for administration, including salaries for administrative personel.  Drug spending is a particular focus for spending concerns and here is very clear that pricing is responsible for the fact that the US spends twice as much per capita as the average developed nation.  When you look at all the factors and data, it seems very apparent to me that we actually can take some pride in how we have created a more efficient system.  But if we want to slow spending, we will need to pay clinicians and administrators less or find other ways to lower the unit cost of services.  Do you think a lower paid physician is going to provide better care?

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