The American Health Care System: Costly and Inefficient

My last Journal of Economic Perspectives showed up in the mail at the end of the year.  This journal is published by the AEA and I always like it because the research is both topical, academic, and empirical.  The empiricists publish here.  I was originally drawn to an article on the economic aftermath of Hurricane Katrina for obvious reasons.  However, what has now caught my eye is a series of articles under a Symposia heading of Health Care.  I have to put a disclaimer on the information that I’d like to share with you.  It is this:  I’m a financial economist and not a health care economist.  While I understand the analysis, methodology and basic tools of the trade in these articles, I’m unfamiliar with the databases and specifics of this market.  As you know I’m also not a microeconomist by nature either.  This is highly applied microtheory.  So, my depth and breadth of  knowledge on this issue is not what it is on some of the other things I’ve written about. I’m simply sharing other folks’ research with you

There were two specific articles that caught my attention.  The first was by Jonathan Gruber and is entitled “Incremental Universalism for the United States:  The States Move First?”.    The second is by Alan M. Garber and Jonathan Skinner.  It is entitled “Is American Health Care uniquely Inefficient?”   Both titles offer up important questions. This is especially true when it is possible that Health Care reform may once again be back on the policy table.  Let me highlight a few findings that stood out to me.

Garber and Skinner’s article is tractable so you may want to read it in its entirety.  The only wonky thing in it is a simple production function which every one should have covered in a basic microeconomics class.  It is brimming with some great stylized facts.  The preliminary literature review covers many studies that basically have shown that Americans are very dissatisfied with the health care system and that the U.S spends more resources on providing Health care than other nations.   According to the article and OECD (2008), in 2006, the U.S. spent 15 percent of GDP on health care where as France and Germany spent 11 percent, Canada spent 10 percent and the UK and Japan  spent 8 percent.  Given our economy as measured by GDP is much bigger than any of these individual countries, that’s a lot of money.  This information is not stated, however, on a per capita basis which I’d have liked to see for argument’s sake.

These researchers and many others have tried to come up with a way of observing and predicting health care efficiency. The reason this article is a joint effort by a medical doctor and an economist is that this requires several types of numbers.  Some of the efficiency numbers include medical milestones, like improvements in cardiovascular health or the survival rate of premature infants.  The economic efficiency studies mostly examine costs.  Another interesting ‘cost’ the literature review mentions is that in the U.S. health care system, there are some extremely high costs.

The first cost to grab my eye is that around 20-30 percent of health care spending or 3-5 percent of GDP according to research done by other authors (Skinner, Fisher, and Wennberg notably) is in avoidable deaths and medical errors.  Several papers find that this is much more common in the United States than the European countries.  Other studies suggest that the U.S. Health Care system is both inefficient in terms of allocation and costs have shown that physician’s earnings are much larger here.

Among the countries considered, U.S. physicians lead with average earnings of $161,000, compared with average earnings of $107,000 for physicians in Canada, $118,000 in the United Kingdom and $92,000 in France.  Specialists are also generally paid more in the United States, although the Netherlands is an exception (Peterson and Burton,2007).  But the difference in reported salaries do not appear to explain entirely the dramatic difference in cost per procedure.

The others find that the U.S. tends to

 consume more health care on a per capita basis in comparison to other developed countries, but consumption of highers inputs alone does not explain why the United States spends twice as much on a per capita basis.” 

Another interesting feature mentioned in this article was that  “incentives embedded in physician payment mechanism”  appear to be part of these higher costs and contribute to over-utilization.    An example of this is that in Japan, doctors earn additional compensation for prescribing drugs and therefore Japan has the highest antibiotic consumption rate in the word.  In the U.S., physicians earn money by prescribing additional diagnostics like imagining studies so the use of these things has experienced a 10% annual growth rate in recent years.

The conclusions in the article are interesting.  First, the authors find that care in the U.S. is not  ‘uniformly’ provided for people with similar clinical conditions. They also find that health insurance expansion may not reduce expenditures at all unless they are coupled with “aggressive measures to limit high-cost hospitals and regions”.  The authors find that a lot of hospitals in the U.S.  are more “resource intensive” than those in other similar, developed nations.  Consumption of things like MRIs and inpatient surgery appear to be high for the U.S. and as mentioned, the U.S. health care system tends to offer an array of the most expensive treatments.  The authors mention that this might actually be due to physicians groups looking to improve their bottom lines more than provision of medically necessary treatment.   Another interesting finding was  that American consumers choose the most-expensive health insurance policies  that send them to high cost providers.

I couldn’t find a direct link to the Gruber article for you. It appears you’ll have to use a library that can get at some of the journals if you want to read it.  Here’s a link to his slides for an address at a symposium that will give you some of the general flavor.  The Gruber study basically offers up ways to take the Massachusetts health reform plan of 2006 to the nation. I especially liked this article because it succinctly sums up what are considered the three critical issues of providing universal insurance coverage:  pooling, affordability, and mandates.

If there is any interest in the Gruber study or further discussion of these issues, I’d be glad to do a much more detailed summary of his findings.  Meanwhile,  I’m headed back to monetary policy and exchange rate policy in search of my own publications.