You Get What You Pay For?

In the United States, we know what our medical care costs are, but we haven't a clue what our real health care expenditures are. And...

In the United States, we know what our medical care costs are, but we haven't a clue what our real health care expenditures are. And the rest of the world doesn't know what it spends on health either.

This is not just a difference in words, since the way we fix what is wrong with spending depends upon whether we are talking about medical care or health care. Generally, what we call "health care costs" is really spending on medical care. Medical care is only part of health care, as it is largely made up of what happens between patients and doctors. The United States indeed spends a lot on medical care. But if we confuse health care and medical care, we might conclude that our medical care system is responsible for an individual's overall health, when medical care is a very small part of the picture. Nonmedical factors such as lifestyle and genetics play a large role in determining life expectancy. And in the United States, which ranks 23rd in life expectancy, factors such as race, ethnicity, education, socioeconomic status and geography contribute to this country's significant disparities in health.

These differences between health care and medical care are important when discussing how to overhaul the overall U.S. health system. To calculate health care expenditures, we would need to include widespread social expenses, such as law enforcement to combat violent crime, a portion of prison costs as a deterrent to crime, the cost of city green space construction to permit jogging, a portion of the cost of after-school programs to help deter teen pregnancy, a portion of welfare payments to combat poverty, subsidized housing, and the costs borne by children of the elderly who care for their parents at home, to name a few. Those are rarely included in calculations of what we call "health care costs."

Medical costs are easier to compare than health costs, which can create confusion. The comparative statistic across countries is called National Health Expenditures, or NHE. "National Medical Care Expenditures" would be a more appropriate term, since these "health expenditures" typically measure spending on medical care rather than on the larger activities that influence health care. In 2007, the NHE for the United States totaled $2.2 trillion. For each dollar, 31 cents purchased hospital care, 22 cents paid physicians and other health care professionals, 10 cents purchased prescription drugs and 7 cents went toward nursing home care. The remaining 30 cents was spent on other kinds of medical services such as home health care and dental care as well as program administration.

Based on other countries' NHE, are U.S. medical expenditures the highest in the world? In fact, they are. We spend about 16 percent of our gross domestic product on medical care. But think for a moment about GDP: What does the percent of GDP have to do with anything?

The gross domestic product of a country measures the total value of what the country produces. Every country, whether the United States, Canada or those in sub-Saharan Africa, must have its GDP add up to 100 percent. The differences in the categories that make up GDP and the priorities each country gives certain services point out how spending growth in one priority area might decrease the funds available for other services. For instance, what does it mean that Canada spends 10 percent of its GDP on health care but only 1 percent of GDP on defense while we spend 15 percent on health care and 4 percent on defense? One of the reasons Canada can spend less on defense may be that it has a neighbor to the south that spends a lot on the defense of North America. On the other hand, Canada spends a greater percentage of its GDP on nonmedical but health enhancing "social programs" compared with the United States. And that key difference is not reflected when comparing the statistics on medical expenditures.

A more reasonable measure than GDP is spending per capita. Dividing total medical spending by the number of people in a country shows how much countries spend per person. Even so, our per capita spending is still the highest: In 2006 numbers (the latest available that compare the United States with other countries) we come in at $6,714 per capita -- more than double the median per capita expenditure ($2,824) of the 30 industrialized countries that form the Organization for Economic Cooperation and Development. The closest European country behind us is Norway at $4,520, followed by Switzerland at $4,311. Each of these countries is a high spender by European standards but represents only about 67 percent of what the U.S. spends.

But, remember, these are medical (not health) expenditures.

Even if there is more to paying for health than just medical costs, why is medical care spending so much higher in the United States? There are five main reasons. The first has to do with the price of our medical care. Physicians in the U.S. are paid around three times more than physicians practicing in public systems in other developed countries, and hospital payments are also three times higher. Spending on pharmaceuticals in the U.S. is double that in Europe and Canada because the prices in the U.S. are higher, not necessarily because we use more drugs. We also use expensive technology to a much greater extent than others. In addition, many health-related industries in the United States are private, for-profit, and often traded publicly. Essentially no other country has the number of for-profit organizational arrangements in health care, and most other industrialized countries distribute new technologies more slowly than we do, which slows health spending. Although some think the United States has the largest number of doctors, we actually have fewer physicians per 1,000 population than the European average (2.4 vs. 3.1), about the same number of nurses per 1,000 (10.5 vs. 9.7), and fewer hospital beds per 1,000 (2.7 vs. 3.9). Generally speaking, Americans spend less time in the hospital and go to the doctor less frequently, but we pay higher prices for the same medical goods and services, and this makes our overall spending higher.

Second, in virtually all other countries there is a single health care system that, with great bargaining power, sets prices for physicians, hospitals and pharmaceuticals. In contrast, our mostly private system uses a market-based system that allows medical technology and new medicines to come to physicians and patients more quickly. However, for this privilege we pay the price -- pharmaceuticals are a lot more expensive in the U.S. The Medicare program is prohibited from bargaining with drug manufacturers, therefore preventing the large federal program from using its purchasing power to lower prices. President Obama has indicated that he supports letting the federal government bargain with the pharmaceutical industry on behalf of Medicare beneficiaries.

Third, the United States does not have a system of centralized medical decision making. Other industrialized countries weigh the costs of new technologies along with the benefits, which slows the introduction of new medicines and treatments. Most Americans would not support this model for fear that new medical advances would be delayed, but the centralized medical decision-making systems in other countries do reduce spending. In addition, U.S. health care providers are rewarded for doing more, not less. Compared with single-payer systems such as Canada, health services here are more expensive, patients are treated more intensely and hospitals are less efficient.

The fourth reason is administrative complexity. Overall administrative costs in the United States have been estimated at 24 percent of health spending. The U.S. has a multitude of health insurers, and each has its own rules regarding what tests will be covered, what drugs patients receive, and whether special approvals are required for them. If you consider this complex set of rules, procedures and forms and compare it with any other country's more centralized and standardized system, it becomes obvious why receiving medical care in the U.S. is more expensive. Most developed countries are way ahead of us in the introduction of electronic medical records, which facilitate billing, eliminate repeat testing and provide immediate feedback to physicians as to the most appropriate care.

The final reason U.S. medical costs are higher than other countries can be explained by our relative wealth. The gross domestic product per capita has a direct bearing on how much health and medical care we consume. Not surprisingly, people in those countries with higher earnings and greater spending have a larger appetite for health care. Clearly, the ability to pay for medical care will have an effect on the amount one consumes.

Medical malpractice is a commonly cited reason for higher U.S. health spending, and politicians, physicians and the media all call for reforming the medical malpractice system in the name of controlling health care costs. Capping malpractice awards has been on the legislative agenda in Congress and in most statehouses for years, and most physicians will admit to practicing expensive "defensive medicine" to avoid being sued by their patients. Malpractice litigation is a problem in the United States, but there is little evidence that it is a serious cost component as it makes up less than 1 percent of total health spending. Defensive medicine may contribute more, but it is difficult to calculate. Experts report an upper estimate of about 9 percent of health spending that may be attributable to defensive medicine.

There is widespread agreement that the United States spends too much for medical care per capita. However, even if administrative costs went from approximately 30 percent to 5 percent (found in other systems around the world and in our own Medicare system), we would still spend more than most developed countries but be more in line with higher-income nations such as Switzerland. Is it possible to bring our health costs more in line with those of other countries and save money? Perhaps -- by reducing waste. And that is the topic for next month.