Deconstructing Health Care Costs

Health care costs by the numbers:

• Americans spend $7500 per capita on health care. This is the highest in the world. The nation with the next highest spending is Norway, at $5000; we spend 50% more. Even though our spending on health care is higher, our health outcomes are generally worse than those of other industrialized nations.¹
• In 2002, 5% of the people with the highest health care expenses in the U.S spent 49% of the overall health care dollar. On the other hand, 50% of the population spends just 3% of the overall health care dollar.²
• The elderly tend to spend more of the health care dollar. At 13% of the population in 2002, they spend 36% of the overall health care dollar.
• In 2002, the five most expensive health conditions were heart disease, cancer, trauma, mental disorders, and pulmonary conditions. They account for about one-third of all health care spending. 25% of Medicare beneficiaries account for 85% of all Medicare spending; among the 25% of these beneficiaries, 75% have one or more of the top 7 most expensive medical conditions.²
• The rise in spending on the five most expensive health conditions between 1987 and 2002 was related to the rising numbers of people with the conditions, rather than a rise in the amount of spending per person with the conditions.²
• 10% of all health care spending, and 25-30% of all Medicare spending, goes to those in their last year of life.³
• The difference between health care expenditures for the elderly and the non-elderly is greater in the U.S. than in other industrialized nations. This difference is in part explained by the fact that the elderly in the U.S. have virtually universal coverage, more than the non-elderly; other industrialized nations have more universal coverage at all ages, and so don’t see this steep rise.⁴
• The cost per health visit or procedure is much more expensive in the U.S. than in other industrialized nations.⁵
• Health care administration costs are over $1000 per capita in the U.S. compared to $300 in Canada. The percentage of administrative and clerical personnel in the U.S. health care labor force grew 50%, from 18% to 27%, between 1969 and 1999.⁶

If most of our health care spending goes to the elderly and those suffering from chronic disease, then most of our effort to reduce spending needs to be concentrated there. Since the rise in spending on patients with chronic diseases results from an increasing number of patients with chronic disease, rather than an increasing cost of individual treatment, then prevention would be in order.⁷ For care at the end of life, we need to be less aggressive at treating conditions which will not extend life or contribute to its quality.

If our goal were to reduce health care spending to the level of other industrialized nations, we might want to concentrate on reducing expenditures in areas where we spend more. The McKinsley Quarterly has a well-done report on Why Americans pay more for health care⁸ The most prominent categories in which U.S. health spending exceeds that of other countries are outpatient services, pharmaceutical prices, and health administration and services. The report notes the difficulties we face in trying to bring health care costs down, including:

• Demand. People are less healthy and require more services, and there is no value consciousness, since individuals only pay 12% of the total health care costs.
• Supply. In other industries, innovation tends to drive prices down, but this is not the case for innovation in health care, which tends toward more expensive equipment and procedures. The report cites this as a difficult problem to overcome: how do we promote innovation, which tends to drive costs up, and not drive those costs up?
• Intermediation. Fee-for-service reimbursement increases incentives to provide more health care than is necessary; fear of malpractice contributes, as well. The report also notes that Medicare prices become a benchmark for private insurance to follow, but that Medicare’s cost-plus formula reduces pressure on providers to reduce costs.

It seems that prescriptions for reigning in health care spending will require attacking several different areas, and that the more simplistic recommendations from either the liberal or conservative side of the political sphere are not sufficient.

¹ Health Care Spending in the United States and Selected OECD Countries
April 2011; It’s a Ripoff! -or- Why America Spends So Much on Health Care
² The High Concentration of U.S. Health Care Expenditures
³ The Economics of Dying; How Much Do We Spend on End-of-Life Care?
⁴ Health Care Expenditures in the OECD
⁵ International Federation of Health Plans 2009 Comparative Price Report Medical and Hospital Fees by Country
⁶ Costs of Health Care Administration in the United States and Canada
⁷ Prevention: The Answer To Curbing Chronically High Health Care Costs (Guest Opinion)
⁸ Why Americans pay more for health care