The Best Health Care in the World: Part Two – What does it cost?

March 13th, 2008 by

In 1992 I became a Trustee of a major, tertiary care, teaching hospital in Massachusetts. For Trustee indoctrination, new Trustees spent a week in a classroom learning about every facet of hospital life. One morning we were briefed by the hospital’s CFO. I was astonished to learn that the hospital had 27 different billing systems, one for each insurer and HMO with which it did business. To me, this was Kafkaesque. I mention it now, because in the intervening years, the situation has become worse, much worse.
At 31% of total US health care expenditures, the administrative costs of healthcare providers are double those in Canada (Woolhandler et al, New England Journal of Medicine, August 21, 2003, page 768), and, with the exception of tiny Luxembourg (population 425,000), America’s health administration and insurance costs are the highest of any of the world’s developed democracies.
We spend more, far more, than any other country in the world on health care. Do we get what we pay for? In Parts Two and Three of this series on health care, we examine that question. In Parts Four and Five we relate it all to workers’ compensation, at 3% to 4%, a tiny room in the American health care house that Jack built.
The US compared with other developed countries: The cost explosion.
The United States has been a member of the Organization for Economic Cooperation and Development since the OECD’s founding in 1961 (the forerunner of the OECD was the Organization for European Economic Cooperation, set up under the Marshall Plan in 1947). There are 30 member-countries of the OECD, all democracies, most of which are thought to be the most economically advanced nations in the world.
In September, 2007, the US Congressional Research Service, the best research group you’ve never heard of, published a report for Congress titled, “U.S. Health Care Spending: Comparison with Other OECD Countries.” (Abstract , including downloadable full report in PDF.) This 60-page, well sourced report paints a grim, if occasionally confusing picture.
Until 1980, US spending on health care, as measured as a percentage of gross domestic product (GDP) ranked at the high end of OECD countries, but not excessively so. In 1980, US spending as a share of GDP was 8.8%, which compared favorably to Sweden’s 9.0%, Denmark’s 8.9%, Ireland’s 8.3% and the Netherlands 7.2%. True, spending in the United Kingdom, at 5.6%, France and Norway, at 7.0%, each, and Canada, at 7.1%, was lower, but no one could claim that the US spending was out of control.
Then something happened. By 1990, our spending as a share of GDP had grown to 11.9%, while the rest of the OECD countries remained fairly static – Sweden’s and Denmark’s declined to 8.3%, the UK’s rose to 6.0%, and so on. And by 2003, the US share had ballooned to 15.3%, nearly three percentage points higher than Switzerland, at the time our closest competitor. In fact, in 2004, the OECD average spending as a percentage share of GDP, excluding the US, was 8.6%, just over half of the US share.
In the average OECD country nearly 74% of healthcare costs are publicly financed; in the US, less than 45 %. Moreover, per capita health care spending in OECD countries, excluding the US is $2,438; in the US, per capita spending is 250% higher, at $6,102.
When analyzing why the US spends so much more on health care, one hardly knows where to begin, because in nearly every category we dwarf the field.
Take prescription drugs, for example. Average per capita spending on pharmaceuticals among all OECD countries, including the US is $383, but in the US it is $752, which is $153 dollars per person more than the second largest spender, France. Despite this, because the US spends so much on all of health care, pharmaceuticals account for only 12.3% of total spending, which is near the bottom of the pack among all OECD countries where average spending on pharmaceuticals is 17.8%.
One would think, perhaps, that spending is so much higher in the US because we have more hospitalization, or doctor visits per capita, but one would be wrong. Hospital discharges per 1,000 people in the US are 25% lower than the average for all OECD countries, and doctor visits are 42% lower.
Well, maybe people have significantly more intense and aggressive service while they are hospitalized in the US? One indicator of intensity is the average length of acute care hospital stay. In the US, the length of acute hospital stay is 5.6 days, which is less than all but eight of the other 29 OECD countries. But shorter stays could mean higher efficiency. A better way to look at it is to look at specific causes for hospital stays, like heart attacks, for instance. The US average hospital stay following acute myocardial infarction is 5.5 days, the lowest in the OECD.
Consider childbirth. Here the US has the third-lowest rate of stay, 1.9 days – much shorter than the OECD average of 3.6 days.
Another reason for high costs in the US is our aggressive testing. Only Japan has more CT scanners and MRI units per million people.
And, although doctors will roll their eyes when they read this, still another reason for our higher costs is physician compensation. At an average of $230,000 and $161,000 for specialist and general practitioner pay, respectively, each of these groups earns more than double their OECD counterparts.
Clearly then, there is no denying that, for whatever reasons, the US outspends its OECD partners by a long shot. The question that has to be asked is: Are we getting what we are paying for? All of us, taxpayers, employers, employees and individuals – the collective “we.”
That will be the subject of Part Three in this series.
Prior posts in this series:
Part 1: The best health care plan in America

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