Thursday, October 31, 2013

Explaining the High Cost of Health Care Spending in the United States

With Obamacare making the news cycle on a daily basis since its launch, I wanted to examine America's health care situation from another vantage point, that of health care spending, prices and quality and see how the U.S. health care situation compares to its OECD peers.

A 2012 study by David Squires of The Commonwealth Fund, a private foundation that aims to promote high performing health care systems, analyzes data from 13 industrialized nations including Australia, Canada, France, Germany, Japan, New Zealand, the United Kingdom and the United States among others.  As you can see on this graph, the United States (black line) spends far more on a per capita basis on health care than any other OECD nation:

An important issue to note from this graph is the fact that per capita spending on U.S. health care is rising far faster than all other OECD nations in the study, a prospect that is not healthy for consumers.

On a per capita basis, health spending in the United States (in 2009) came in at $7960 annually, more that double the OECD median of $3182 and nearly three times Japan's $2878.  The author of the report further break down spending on health by the source of funding (i.e. whether it is private or public).  Private funding of U.S. health spending is the largest among its OECD peers by a huge margin, coming in at $3189 per capita per year.  The second highest national private health spending was found in Canada with $646, less than one-fifth of the U.S. level.  Norway comes in last place in private spending on health with per capita private spending of only $43.

Moving on, here is a graph that shows the total expenditures on health as a percentage of GDP, again, with the U.S. data in black:

In total, health spending in the United States was 17.4 percent of GDP, well above second place Netherlands which came in at 12.0 percent of GDP.  In last place was Japan which spends only 8.5 percent of GDP on health care.  Interestingly, Japan's low cost of health spending is closely related to its cost control through aggressive price regulation through the imposition of a nation-wide fee schedule.  While this may appear to be a solution to extremely high costs, some health care economists suggest that price regulation can create shortages of service, reduce the quality of service and stunt innovation.  As well, Japanese doctors work an average of 71 hours per week compared to 51 hours per week in the United States because they are forced to prioritize quantity of service as opposed to quality of service for patients.  Japan's policies may also have created a severe shortage of some specialists since there is more money to be made in general practice than in money-losing specialities like surgery and obstetrics.

Why is American spending on health care so much higher than other developed economies?  One potential explanation suggests that the high level of spending on health care in the U.S. is related to the aging population, however, this is not borne out statistically.  While the U.S. population is aging, thanks in no small part to the hordes of baby boomers, the United States has a very low percentage of elderly (over 65 years of age) compared to its OECD counterparts and, at 13.0 percent, comes in well below the OECD median of 15.8 percent, as shown on this chart:

In fact, only New Zealand has a lower percentage of citizens over the age of 65 than the United States, coming in at 12.8 percent.  The nation with the highest percentage of older citizens is Japan which, oddly enough, has the lowest per capita and overall spending on health care.

Obviously, there are other factors at play that explain the high overall spending on health care in the United States.  Here are five of them:

1.) Obesity:  When obesity is defined as having a body mass index of 30 or more, 33.8 percent of Americans were considered obese in 2009.  This is the highest rate among all thirteen OECD nations in the study; New Zealand came in second place at 26.5 percent and Australia came in third place at 24.6 percent.  Coming in last place was Japan at only 3.9 percent.  Since there is a connection between obesity and health issues, a higher level of health service utilization accompanies a population that is obese.

2.) Hospital Costs:  The United States has fewer hospital beds at 2.7 per thousand population than the OECD median of 3.2 beds per thousand.  The duration of hospital stays in the United States is shorter than the OECD median coming in at 5.4 days compared to the median of 5.9 across the OECD study group.  This is well below Canada's 7.7 days and the 7.5 days in both Germany and Switzerland but above Sweden's 4.5 days.  All that said, the cost of individual hospital stays in the United States is, by a very wide margin, the highest among the 13 nations as shown on this graph:

3.) Prescription Costs:  As shown on this chart, the cost of most commonly prescribed drugs varies greatly among the OECD nations (the cost of the drugs is set a 1.00 for the United States):

While the cost of generic drugs is relatively low in the United States (second lowest after New Zealand), the cost of brand name drugs is the highest among all thirteen nations and is between two and three times more costly than in every other nation except Canada.  As a result, overall drug costs in the United States are nearly twice as high as the OECD median.

4.) Physicians' Fees:  The cost of a visit to a primary care physician in the United States is the highest in the study, coming in at $133 for private payer compared to the median of $104.  These higher fees for physician services have resulted in this:

...and this:

5.) The Penetration and Usage of Diagnostic Equipment:  The United States has among the highest number of MRI machines per million population among the nations in the study at 25.9, coming in second place to Japan at 43.1 per million population.  The OECD median is 8.9 MRI machines per million population.  This compares to 8 machines per million for Canada and 5.9 per million for Australia.  Physicians in the U.S. are also more likely to recommend the use of MRI for their patients; 91.2 exams per population population, the highest among its OECD peers and more than twice the median of 43 per thousand population.  The number of CT scanners per million population in the United States (34.3 scanners per million) is also more than twice the OECD median of 15.1 per million and the number of CT scans (227.9 scans per thousand) is also nearly twice the OECD median of 122.8 exams per thousand.

Now, you might say that all of the money spent on health care in the United States leads to better outcomes and better overall health.  As shown on this graph which shows the five year survival rate for three common cancers, outcomes in the United States are not markedly better than its peers:

While this is just a partial measure of health care efficacy, it is symptomatic of the problems facing the American health care system.

While the introduction of Obamacare will help millions of uninsured Americans, this analysis by the Commonwealth Fund shows that there are underlying issues in the U.S. health care system that the implementation of universal health insurance will not be able to cure.  Until there is some way of controlling costs, Americans will find themselves laying out more than their OECD counterparts for health care either through out-of-pocket spending or through rising health care premiums and taxes.


  1. Thanks for highlighting obesity as one of the drivers of healthcare cost. This huge problem is growing larger, it already cost America over $190 billion a year. Obesity accounts for about 21% of the amount spent on medical services and is set to rise much higher. If current trends continue, by 2030 the estimate is obesity will probably cost the country $550 billion a year. One third of adult Americans are overweight, and another third are obese according to the National Center for Health Statistics. More ominously, almost a third of those under 20 years of age are overweight or obese. More on the cost of this growing problem below,

  2. You missed discussing the legal system's role in health care costs. Also cost shifting. Also accelerating university costs feed into medical cost inflation by increasing the debt of doctors.