Liberty and Medicine

Friday, February 23, 2007

Does the U.S. Spend More?

The following report is reprint from John Goodman's Health Blog. It makes some important points on the distortion that takes place in comparing the health services between the US and other nations -- always used to justify socialized health care. He notes that these comparisons are false because many of the costs for other delivery systems is disguised in the manner he outlines below. We shall also be posting an article concerning how one way socialized health care keeps costs down is by refusing treatment to needy patients.

A new report from McKinsey claims that the United States spends $477 billion a year - $1,645 per person - more on health care than other OECD countries do, after adjusting for differences in income and wealth. To make matters worse, we do not get better care. Paul Krugman of the New York Times is going gaga over the report.

However, the study makes a fundamental economic error, surprising for McKinsey. The real social cost of any good or service is not the amount of money spent on it. It is the real resources used to produce it. This is especially important in health care, where the suppression of market forces in every country makes cash flows an unreliable indicator of real resource use.

Surprisingly, there are fewer practicing physicians, nurses and acute care bed days per capita in the United States than the average OECD country. We do use 54 percent more medical devices - defibrillators, pace makers, coronary stints, hip implants, knee implants, etc. But our consumption of drugs is 20 percent lower than in other countries. If health outcomes among developed countries are pretty much the same, the United States does not look so bad in terms of resources used to produce those outcomes.

In the McKinsey study, almost 60 percent of the higher U.S. cost of care stems from high prices paid for inputs. However, in other developed countries, governments use their buying power to force providers to accept below-market reimbursement, just as Medicaid and Medicare do in the United States. For instance, the income of a physician is 5.5 times that of the average worker in the United States, on average. The ratio for Germany and Canada is 3.4 and 3.2 respectively. The comparable ratio is 1.5 in Sweden and 1.4 in the United Kingdom.

Monopolistic buying power - however, does not lower the real social cost of health care; it shifts those costs. A different way of achieving the same result would be to pay doctors market-determined fees and then impose a special tax on them, leaving their net income where it is today. The virtue of this alternative is that it would be clearer that social costs have not been lowered; they have merely been shifted to the providers of care.

A few other economic errors in the McKinsey report are worth noting. They treat the profit of for-profit hospitals as a cost not borne by public hospitals - as though capital used by government has no opportunity cost. And they treat the taxes paid by for-profits as a cost not born by public hospitals - as though real social costs were affected by whom the government chooses to tax.

I'll save the quality discussion for another day, but leave you with this thought. If the United States performs far more knee replacements than other countries then one of two things must be true: either 1) we are increasing the quality of life for our seniors relative to seniors in other countries, or 2) we are subjecting our old folks to a lot of unnecessary (and painful) operations.

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At 8:54 AM, Blogger bgprior said...

Don't disagree with your analysis or conclusion, but a couple of points:

1. I suspect that figure of 1.4 for the ratio of physicians' average wagee to the national average wage in the UK is very out-of-date. There has been much discussion over here about how, since renegotiating their pay deal with the Government, GPs are typically paid over £100,000 p.a., compared to a national average wage of around £25,000 p.a. (I don't know if £100k is an accurate average, or just a popular number, but it's indicative of the level of pay).

2. Is it not true that the biggest unnecessary cost inflicted on your medical system is the compensation culture and the level of liability against which American doctors have to insure (not to mention the risk that their career might be ended prematurely), compared to most other rich nations? That, of course, has nothing to do with quality-of-care or the merits of a primarily private vs socialised medical system. It does, though, suggest what might be done to make the American system look more effective - reinstating the notion that accidents can happen and that not everything bad has to be blamed on someone (i.e., to use Rumsfeld's phrase, "stuff happens").

As a Brit, it matters to me that America puts its house in order in this regard, not only because we tend to follow your trends and the compensation culture is becoming more prevalent over her, but also because we desperately need to do something about our socialised healthcare system, and as soon as anyone suggests a proper market solution (compared to the botched internal market that our socialist government tried to introduce), opponents of the market raise the American model and its apparent high cost compared to our own.


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