Why the U.S. Spends More on Health Care

The McKinsey Quarterly has an analysis of health care spending and believes:

“that the United States spends $650 billion more on health care than might be expected given the country’s wealth and the experience of comparable members of the Organisation for Economic Co-operation and Development (OECD).

The costs for outpatient care are growing fastest because of the movement from inpatient to outpatient surgery and by the increasing expense of outpatient care. Specialist care drives cost and as the number of generalists decrease because of economic factors, this trend can be expected to accelerate.

“Outpatient care is by far the largest and fastest-growing part of it, accounting for $436 billion, or two-thirds of the $650 billion figure. The cost of drugs and the cost of health care administration and insurance (all non medical costs incurred by health care payers) account for an additional $98 billion and $91 billion, respectively, in extra spending.”

“Far more important was a surge in the average cost per visit resulting from factors such as the additional care delivered during visits, a shift toward more expensive procedures (for example, diagnostic ones such as CT and MRI scans), and absolute price increases for equivalent procedures. In all likelihood, costs have also gone up because over the past decade there has been a marked shift in the delivery of care, from general practitioners to specialists.”

Prescription drug costs are driven by our resistance to using cost effectiveness as a guide to use and our reluctance to negotiate prices with manufacturers. Patents are part of the problem here. We claim we want a “free market” but provide pharmaceutical companies with a generation long monopoly. This might work if these companies weren’t so greedy. Their pricing is predatory rather than realistic. They say to patients we’re going to charge whatever we can, without relation to cost of development, taxpayer’s contribution to the drug’s development or efficacy. We need patent reform.

“After outpatient care, the category with the highest above-ESAW expenditures, at $98 billion, is prescription drugs-not because Americans are buying more of them but rather because they cost 50 percent more than equivalent products in other OECD countries . The United States also uses a more expensive mix of drugs; the price of a statistically average pill is 118 percent higher than that of its OECD equivalents.”

The inefficiency of administration is attributable in part to the profit need of insurers and the duplication of efforts over many states: marketing costs, underwriting, claims processing, and overhead.

“The third-largest source of above-ESAW spending is health administration and insurance, at $91 billion. In this category, the United States spent $486 per capita in 2006-twice the outlay of the next-highest spender, France, with $248, and nearly five times the average of $103 across peer OECD countries.

Of the $91 billion in above-expected spending, $63 billion is attributable to private payers. Profits and taxes-a negligible expense in OECD countries with single-payer systems-account for nearly half of this total. The cost of public administration for Medicare, Medicaid, and other government programs accounts for the remaining $28 billion in US above-ESAW spending.”

McKinsey doesn’t offer firm proposals to fix the system but does provide a strategic framework that’s worth reading. What’s clear however is that our current system is broke. It provides mediocre care at a very high cost.

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