Why the US spends more on healthcare than other countries

Disparities in health expenditure across OECD countries: Why does the United States spend so much more than other countries? This is the title of Mark Pearson’s before a US Senate Committee on Aging in September this year. Pearson is the head of the health division at the Organization for Economic Cooperation and Development (OECD). In his testimony, he provided information and insights on how the US health care system compares to those of other OECD members. OECD has currently 30 member countries, mostly developed. These countries are committed to “democracy and market economy2 and their governments come together “to compare policy experiences, seek answers to common problems, identify good practice and coordinate domestic and international policies”. In previous post, I highlighted the fact that the US is in the frontline of cancer treatment but lags behind in other chronic diseases.

According to Pearson (source MarketWatch Blog):

“What you’ve got in the U.S. is a very large range of care. When people say U.S. care is the best in the world, if you’re talking about the really good hospitals, yes it is. But when you’re talking about the average the population faces, it’s middle-of-the-pack on lots of things but very, very good on cancer.”

Pearson presented the following statistics:

• The US spent the most (15% to its GDP) on health care in 2007. OECD average was 8.9%.

• US life expectancy (78.1 years) is lower than the OECD average of 79.1.

• Japan seems to be getting the most out of its money –spending 8% of its GDP on health care to have a life expectancy of 82.6 years.

• As a point of comparison, the US spent in 2007 $7290 per person for healthcare. France, which has a universal health system, spent $5365 per person in the same year.

So why does the US spend so much but get little in return? Pearson gives the following reasons:

[The US health care system]…is a system which introduces new technology rapidly – at a price. It delivers (in some areas at least) high quality of care, together with greater innovation and choice than in most other OECD systems. But it is not a system set up to bend the cost curve, unlike many other OECD countries.

The US system leaves patients largely indifferent to the price eventually charged for a medical good or service. Those who have insurance know that their costs will be covered. Physicians know this, and furthermore have an incentive to offer services as they are, largely, paid on a fee-for-service.

‘Defensive medicine’ due to the threat of litigation, gives a further reason why physicians might suggest an additional diagnostic test, even if the medical benefits are likely to be limited, and the costs of malpractice insurance pushes up the prices that doctors charge. Because of the high degree of choice, it is difficult to constrain costs because people can opt-out of the more regulated system.

The US has the highest rate of use of many new technologies such as CT scans and MRIs of any OECD country. New technology is likely to be more expensive than cheaper – almost uniquely, throughout all sectors of the economy – because no person or body is concerned with the overall cost level. Combined with other reasons, including the administrative costs inevitable in a multi-stakeholder system, far more complex than existing in any other OECD country, and the result is high prices, high volumes of some activities, and high expenditures.