12 April 2013

The U.S. Still Pays Too Much For Too Little When It Comes To Healthcare

As the infographic below (used with permission at the request of its author) illustrates accurately, the United States based more for its health care in both absolute terms and relative to its GDP than any other developed country in the world.

In absolute dollar terms, the U.S. paid 54% more dollars than the runner up in Norway, a sum of $2,845 per man, woman and child in the entire United States which works out to about $893 billion a year for the nation as a whole - about 25% of the federal government's annual budget.  It is 47% more as a percentage of its GDP than the Dutch who spend a very high percentage of GDP on health care pay.

This would be justified if the quality of care in the United States in materially better than any place else in the developed world, but as the infographic suggests (and other measures also bear this out), the quality of care in the United States isn't materially better than the care provided in peer countries that pay far less for health care. Yet, it secures mediocre health outcomes with its spending.

Key Factors In The Cost Discrepency

The infographic doesn't explain in detail which factors make U.S. health care spending so high and like any big number related to something complicated there are all sorts of factors that contribute to this result, although it does do a decent job at explaining the medicore outcomes that are obtained.

Overpaid Providers

The number one factor in the high price of health care in the United States is that Americans have much higher rates of compensation for health care professionals and pay higher prices for drugs, medical devices, and other health care industry goods and services than peer countries do, pretty much across the board. Basically, the collective mix of multiple government programs, many health insurance companies, and private individuals who negotiate these prices (and government and insurance company negotiators swamp the impact of all other negotiators in the marketplace), are in a system where they are unable to effectively negotiate the prices that are secured by every other country in the world. Also, health care providers in the U.S. have to deal with far more business management, debt collection and administrative issues than health care providers in most of the world and charge more for being managers of complex businesses rather than purely being medical professionals.

In short, the amount of personal compensation that U.S. health care professionals like doctors and nurses receive is far in excess of their developed world peers doing exactly the same jobs by any measure, and the companies that provide drugs and medical devices and the like are far more profitable in the U.S. than elsewhere in the world.  Medical professionals make a decent living in every country in the developed world and drug companies and medical device companies make profits everywhere in the developed world.  But, U.S. compensation levels are extreme by international standards.

To resolve this discrepency all at once would mean pay cuts on the order of 25% to 50% for physicians and a wide swath of other health care professionals and that isn't politically feasible.  But, a remedied system of negotiating provider costs would "bend the curve" of health care inflation over a couple of decades to bring the U.S. more in line with other developed economies.

Excess Administrative Costs

Americans also pay much more than other countries for costs related to establishing eligibility for payment (e.g. getting people to buy health insurance or enroll in government health care programs) and pay more than its peers to processes claims for payment from provides (on both the provider and payor side).

Most countries have eligibility establishment and claim processing costs closer to (or less than) the most efficient U.S. health care financing system in the U.S. with regarding to those costs, which is Medicare.  Government is not the most efficient institution for doing lots of things. But, it is highly efficient at processing huge masses of bureaucratic paperwork.

These higher administrative costs while proportionately higher relative to other countries than almost any other component of the total health care expendiitures of the United States, are only a second or third largest source of the cost discrepency than the basic issue of the rates paid to providers for their services, because it is a small part of the total.

Wasteful Health Care Provision Practices

Wasteful health care provision practices also drive up costs at a similar level of magnitude.  The U.S. provides quite a bit of low value, high cost health care, particularly in geriatric practice (although the share of this attributable to "defensive medicine" as opposed to mere lack of awareness of costs and benefits is surprisingly modest). And, the U.S. health care system strikes a poor balance between inexpensive prevention and condition management, and expensive medical cures, particularly for low income patients.

Not Our Medical Malpractice Regime

One factor that has been repeatedly been shown to have a negligible economic impact on U.S. health care costs is our medical malpractice regime and the cost of medical malpracitice insurance.

Will Obamacare Fix The Problem?

The Affordable Care Act (a.k.a. Obamacare) whose main provisions take effect next year, address some of the important issues that drive up costs, and some of the important issues that impair U.S. health care outcomes (most importantly, the large number of people without health coverage and poor incentives for providers in contracts between payors and providers).

Neither Obamacare, nor any of the Republican alternatives, however, effectively address the single biggest factor, which is the inability of U.S. government to effectively negotiate lower rates from health care providers.

America's Health Disadvantage
Image source: www.bestmasterofscienceinnursing.com

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