Why American Health Care Costs Twice As Elsewhere

July 9, 2012 in Featured News, Health & Lifestyle, U.S. News

Why does our health care cost so much? It’s now documented that administrative costs are a big part of the answer. The dollars wasted in excess spending on health administration and insurance costs in today’s market place would be enough to finance universal health coverage in the United States. That’s according to recent research by the McKinsey Global Institute, and analysis by Princeton economist Uwe Reinhardt.

McKinsey indicates that as much as 21 percent of an estimated $477 billion in U.S. health care spending in 2003 exceeded what we would be spending if U.S. managed health care costs were closer in line with competing developed countries. During the 2006-2008 period, that would have amounted to $120-150 billion. That’s more than enough to finance the annual cost of universal health insurance coverage in this country.

Based on McKinsey’s analysis of country comparative data, the United States would be expected to have spent an average of only $4,819 per capita on health care rather than the $6,714 it actually spent in 2003. More recent estimates of U.S. health care spending in the  $8-9,000 range may be assumed safely to reflect the same disparity, only higher.

Excess health care spending in the United States amounted to an estimated $570-650 billion for the 2006-2008 period. In 2008, that $650 billion amounted to more than five times the estimated $125 billion that would be required to achieve truly universal U.S. health insurance coverage.

“Excess health spending” for purposes here means how much more the United States spends per person on health care compared to other countries in the Organization for Economic Cooperation and Development (OECD), taking comparative economic aggregates and trends into account for each country. These data reveal that the United States spends almost 40 percent more on health care per person than standard economic measures such as GDP per capita would explain.

Reinhardt considers the ramifications of the McKinsey findings in a series of New York Times blog articles, noting that approximately “85 percent of this excess administrative overhead can be attributed to the highly complex private health insurance system in the United States … Product design, underwriting and marketing account for about two-thirds of that total.”

An earlier McKinsey research study comparing the United States and West Germany revealed that in 1990 Americans received $390 per capita less in actual health care than bilateral comparisons would indicate, but spent $360 more per capita on administration, cites Reinhardt. He points also to findings published in another bilateral study in the New England Journal of Medicine (Steffie Woolhandler and David Himmelstein).  Comparing U.S. and Canadian health care costs, the authors estimated that in 1999, we “spent $1,059 per capita on administration compared with only $307 in purchasing power parity dollars (PPP $) spent in Canada.” That study actually included not costs borne by insurers, but also those borne by employers, health-care providers and governments. (Not included in cost estimates was the value of the time patients spent claiming reimbursement.)

Other factors which help explain residually higher health care costs per capita in the United States include higher prices for the same goods and services, more widespread use of high-cost, high-tech equipment and procedures than are used in other countries, and higher treatment costs triggered by “American tort laws, which can lead to “defensive medicine” — that is, the application of tests and procedures mainly as a defense against possible malpractice litigation, rather than as a clinical imperative,” notes Reinhardt.

Reinhardt also notes several popular misconceptions about U.S. health care costs. Frequently, non-experts cite aging population as an explanation. Claims about better quality health care in the United States and better health outcomes from the U.S. system overall also are cited in press, media and political arenas as explanations for higher U.S. costs per capita. In point of fact, data do not validate or justify these contentions.

The studies cited here, and Reinhardt’s analysis make it clear to analyst and layperson alike that administrative costs under our existing health care financing system are a huge burden on American people receiving health care, as well as on actual providers of health care. Also, the excess costs of handling health care coverage under the existing insurance regime have grown to be an enormous and costly drain on the U.S. economy itself.

The accompanying graph summarizes country comparisons made using OECD data in the McKinsey report. It provides a basis for comparing U.S. health care spending compared to that of other nations as measured in Purchasing Parity Dollars (PPP$s). PPP$s are dollar equivalents which buy comparable baskets of real goods and services in different countries. Regression analysis enabled researchers to isolate the strong relationship between health care costs and ability-to-pay, and thus examine other factors explaining deviations such as U.S. excess costs measured against an objective norm. GDP per capita helps explain about 86 percent of the variation in how much different residents of developed countries pay per person for health care.