Squeezing the Providers, Part II

International statistics show that the United States spends twice as much on health care per capita as the average OECD country. But are these numbers accurate?

Health care is a sector where normal market forces have been so suppressed that no one ever faces a real price for anything. So, adding over all the transactions produces a total number whose meaning is very unclear.

To make matters worse, other countries do more than we do to shift costs in ways that reduce the cash flow that government has to fund. For example, other countries are more aggressive than we are at suppressing provider incomes (not just doctors, but also nurses, hospital personnel, etc.)  Here are the numbers on doctor incomes:

Physician-Pay-as-a-Multiple-of-Average-Wage-2

Source: Health Affairs; gated, but with abstract.

On paper, suppressing provider incomes makes the spending total look lower. But as explained in a previous Alert, these actions do not lower real social costs. Costs are merely shifted from one group to another. One could accomplish this more directly by imposing a tax on all doctors and health care workers and using the proceeds to subsidize health care consumption by everyone else. But again, such measures would not lower social costs, they would merely shift costs.

If we ignore the money totals and look instead at real resources, the U.S. system looks pretty good, relative to other developed countries. For example, we use fewer doctors per capita, fewer nurses, fewer admissions, fewer hospital days, fewer beds, etc. than the OECD average; and we achieve as good or better health outcomes. About the only thing we use more of is technology. So with accurate accounting, it may be that the cost of U.S. health care is right in the middle of the pack.

Interestingly, even though other countries do more than we do to shift costs and disguise costs, the money totals over time seem to be growing at similar rates. Over the past four decades, the rate of growth of real per capita health care spending in the United States has been right below the OECD average.

NOTE: The source material for this Alert may be found in a paper I wrote with Linda Gorman, Devon Herrick and Bob Sade on international health care comparisons.

Comments (20)

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  1. Devon Herrick says:

    Liberal health reformers don’t trust competition to rein in health care spending. Rather, all they support is price controls and rationing.

  2. Ken says:

    Very good post. And a very good followup to your previous Health Alert on this same subject.

  3. HD Carroll says:

    I think the most important bit in the post is “Health care is a sector where normal market forces have been so suppressed that no one ever faces a real price for anything.” Not having a proper metric, a realistic measuring stick, makes doing gain/cost analysis on competing reform options difficult at best, if not impossible.

    One small critique – I think the graphic should be headed “Physician Pay as a MULTIPLE of average wage” though I am sure your astute (this is redundant!) readers understand what the graphic so visually illustrates.

  4. Dan Koon says:

    My wife is visiting her mother in Korea this week. Her mother was to have a stent inserted next Tuesday, but decided not to have it as “she didn’t want to spend a week in the hosptial recovering”. When I asked why she would be in the hospital a week, my wife replied “That is the normal time or maybe longer”. Two years ago I had a quad bypass and was home in 4 days! Then she mentioned she was going with her mom to get a massage. She had to pay $35 for the massage, but her mom only payed $5 as she was covered by national health care. Can’t wait to get my $5 massages here in the US.

  5. Linda Gorman says:

    And never mind that national accounting systems defined the boundaries of health care spending quite differently in 1999 so that international spending estimates were largely not comparable. The OECD effort to harmonize national reporting for the industrialized countries by adjusting national reports using its SHA accounting framework was just getting underway.

    In 2000, for example, Japan’s health care spending as reported in its national health statistics excluded both services not covered by public health insurance and services financed by long-term care insurance. Include those, and the standardized internationally comparable SHA estimate would be 127.4% of the amount reported by the national government.

    U.S. national statistics on total health spending (but not subcategories) have been SHA compatible for some time. While Japan looked like it was spending less than the US in 1999, this was partially because the US included things in its national estimates of health spending that the Japanese left out.

  6. John Goodman says:

    Response to HD Carroll: Thanks for the heads up. David Henderson cought the error as well.

    The correction has been made.

  7. Larry C. says:

    Interesting comment by Linda Gorman. In fact, this whole issue is very interesting.

  8. Bob Geist says:

    Right on, John. Managed care systems, whether corporate here or nationalized abroad, make ends meet by caring for the well and queuing the sick. Our queues are shorter because we pay more for care with constant premium inflation. But payimg for expected and affordable care with insurance turms out to be the most expensive and wasteful system ever devised, both here and abroad.

  9. Stephen C. says:

    Very interesting. I’ve never seen this argument made before. Thank God for the John Goodman Health Blog.

  10. Matt says:

    Suppressing physician pay is bad medicine. I am suprised at the fact few if any people are addressing the massive profits that the hospitals are making (this includes not for profit facilities as well).

  11. Kurt C. says:

    I greatly enjoy receiving these updates.

  12. Jim Morrison says:

    Except in instances where doctors are public employees, do other countries actually suppress doctors’ incomes are is it a cultural phenomenon where there simply are different expectations? And why is healthcare the only area in which technological advances don’t drive costs DOWN? Just asking.

  13. Linda Gorman says:

    Technological advances do drive health care costs down. An MRI is a lot less expensive than exploratory surgery, for example. Vaccines are less expensive than treating the diseases that they prevent. Antibiotics have lowered the costs of treating certain infections.

    Other examples include technological advances that have lowered the cost of vision correction surgery and have allowed the switch to minimally invasive surgery which obviates the need for a hospital stay.

    While technological advance may increase overall expenditure because more can be done to improve health and functioning, it isn’t clear that it necessarily increases costs.

  14. Bob B says:

    Excellent article and followup comments. In the research I have done internationally they don’t report apples to apples. Kind of like off balance accounting.
    Why doesn’t technology reduce costs? 50% of the annual cost increases in health care are due to new devices and procedures. We just add and never take away and insurance just pays the charge.
    This issue is well explored in the book HELP Your Health care Hanging in the Balance http://www.robertblades.com

  15. Chris Ewin, MD says:

    John’s point is well said:
    “Health care is a sector where normal market forces have been so suppressed that no one ever faces a real price for anything.”

    You can’t squeeze H20 out of turnips.
    Like our pharmacy colleagues for the past 30 years,
    physicians and hospital payments have been suppressed for years.
    The reasons are well known (third parties),
    and add to the annual begathon by the AMA (definition – A telethon or pledge drive repeated so often that it becomes a constant, shameless, begging for money).
    There are more bean counters (in doctors’ offices/hospitals and TP’s) than mosquitoes along the Amazon.
    It’s also a fee for service problem….If the doctor (primary care) doesn’t see the patient, then he doesn’t get paid even if it’s a cash-paying fee for service practice.
    Normal market forces are applied when physicians work directly for their patients and have pre-paid fees allowing unlimited access to care without the beancounters in the office or third party.

  16. hoads says:

    I dug through the NHE data a while back and I was shocked at what is included in this accounting and how our 17% GDP for healthcare costs is generated. For example, the cost of new medical office buildings, $15 million per year to study Hansen’s disease (leprosy) of which there are less than 200 cases per year in the US, huge luxury renovations at the CDC Center in Atlanta, terrorism response education & preparation conducted by the CDC, of course, all the research at the NIH, but also medical research conducted at academic institutions, all kinds of alternative healthcare including naturopaths, acupuncture, yoga & meditation (but not weight loss centers), sports medicine and therapies including those for professional sports teams and school sports physicals as well as pharmaceuticals and therapies for “learning disabled” kids of which I’m sure the US is #1.

    I’m not saying those shouldn’t be part of an aggregate healthcare measurement however, because the US has had one of the highest levels of disposable income in the world, our healthcare costs reflect our discretionary healthcare expenditures as well as “necessary” healthcare costs and this artificially boosts our healthcare costs in comparison to other countries without our same level of disposable income.

  17. Wes K. says:

    Excellent talk point that we should maybe get some think-tank to develope for us.

    The statistics define “for health care” inaccurately. The dollars may be spent in the health care field and have almost nothing to do with health care itself… It is meaningless to talk about the dollars spent if there is no way to assign a value to what is being purchased– something only the market can do.

  18. Jennie Fiedler says:

    Why does a CT scan cost $1500? Why is bloodwork $1000? If it’s just inflation then we’re in REAL trouble here, because average (middle class) incomes are going down, not up! The “social costs” of healthcare are more than probably most people will be able to bear, even in the short term ahead. When a major illness or injury can wipe out a middle class family there is obviously a problem. What do we do about THAT? I wouldn’t spend $30k on a new car, $250K on a house, because obviously I can’t, but where do I get low-cost healthcare that I can actually afford? Of course I’m going to decline necessary treatment if I can’t afford it, I wouldn’t have a choice. I guess if I’m ever catastrophically ill I’ll just make sure my life insurance is paid, anyway.

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