Health Care Costs
Joseph P. Newhouse
Main Points
The US is an outlier in how much it spends
but not its rate of increase
 Medical advances represent the bulk of the
cost increase
 At the society level it was worth it

Cost Increase in the “G-6”
Annual real % cost increase in the “G-6,” 1960-2003
7
6.6
Real % per Year
6
5.0
5
4
4.9
Average=4.6%
4.1
3.7
3.2
3
2
1
0
Can
Fra
Ger
Jap
UK
US
% Annual
Increase in Real
Personal Health
Care Spending
per Person,
1960-2003
Country
Italy missing data before 1988. Germany 1970-02, Japan, UK 1960-02. Source: OECD Health Data 2005, US GDP deflator.
Similar Increases in Real US
Cost Annual $/person, by decade
Medicare and Medicaid enacted
%/person/yr (real)
7
6.2
6
5
4
Average = 4.4%
5.2
4.8
4.5
3.7 3.7
3.0
3
2
1
0
% Annual
Increase in Real
per capita
Personal Health
Care Spending
40s 50s 60s 70s 80s 90s 0004
Decade
Managed care
Sources: CMS National Health Accounts. Newhouse, JEP 1992(3), Stat Abst, Ec Rpt Pres. GDP Deflator.
What Do These Data Tell Us?

Any explanation of the cost increase needs
to hold across countries and decades


The rate of cost increase is not so dissimilar
among countries, so the institutional differences
among countries are not the explanation
The US is less of an outlier in the growth rate
of cost than in the level of cost
So What Is Raising Costs
Everywhere?

Most plausible explanation of most of the
increase is the new capabilities of medicine


Aging cannot explain much
A management consultant might say the
medical industry keeps developing new
lines of business

Think dialysis, transplants, angioplasty, noninvasive imaging, joint replacement, biotech
See Newhouse, Journal of Economic Perspectives, 1992.
Was It Worth It?

Life expectancy gains in all countries

1970-2002: US life expectancy grew 6.6 years,
from 70.8 years to 77.4 years
–
Most of this gain was from improved mortality from
cardiovascular disease
Life expectancy: Health United States, 2004. Low-tech: Cutler, et al., 1999; Braunwald 1997; generally: Cutler, 2004.
Changes in Heart Disease
Treatment
Messerli, F. H. et al. N Engl J Med 2005;353:1205-1207
CCUs better managed arrythmias. Thrombolytic agents
and angioplasty improved arterial blood flow.
Source: Messerli, et al, NEJM, 2005, 353:1206.
The Challenges
How to pay for care for lower income
groups
 Waste and poor quality in all countries


How to reduce waste without removing
valuable services, cutting future innovation