It’s The Prices Stupid: Why the
U.S. is so Different in Health
Care from other Countries
Econ. 201 – Econ. Data Analysis
Major Point
• The US is an outlier on spending,
spending more than almost any other rich
industrialized country
• Yet the US gets little in measurable
average health benefit for this extra
spending
Overall Spending
• Look at the U.S. compared to the O.E.C.D.
median in exhibit 1
• We are in GDP per capita, yet we spent
more on health spending by both total
amount and % of GDP
• To see this graphically, look at exhibit 2
Correlation Coefficient
• In probability theory and statistics,
correlation, (often measured as a
correlation coefficient) , indicates the
strength and direction of a linear
relationship between two random variables
Correlation Coefficient
• The correlation is 1 in the case of a perfect
increasing linear relationship, −1 in the case of a
perfect decreasing linear relationship, and some
value in between in all other cases, indicating
the degree of linear dependence between the
variables. The closer the coefficient is to either
−1 or 1, the stronger the correlation between the
variables.
• If the variables are independent then the
correlation is 0
Correlation: Health Spending and
GDP
• In all of the OECD data for 2000 the
correlation is .27
• If Luxembourg is eliminated, it goes to .56
• Many countries vary considerably in health
spending, between GDP per capitas of
$25k and $30k
• You will see this in many health spending
relationships: why?
Health Production Function:
Complex and Multivariable
• Draw on board and explain the health
production function
• Probably not a surprise that rich countries
are on the “flat” of this curve
• U.S. is still an outlier though
Not a New Phenomenon
• Look at average annual growth columns in
exhibit 1
One big difference is % of health
spending that is private
• Define this. What is the alternative?
• Notice it is high in the US, and some of the
poorer countries in the data, Korea
• But the amount of public dollars in health
spending in US is about the same as other
rich OECD countries and the OECD
median
Why?
• #1) Not because the US is getting older
– So are other OECD countries some at a faster
rate than US
• #2) Not because we spend such a high
percentage of health care $ on
pharmaceuticals
– Others spend even more as (see exhibit # 3)
Why do we spend so much, contd
• #3) Not because our Health Care workforce is
especially high
– For various types of labor inputs supplied look at
exhibit #4
– Note though “nurses per acute care bed”
• #4) Not because our health care capital is
especially high
– For various types of non-labor inputs supplied look at
exhibit #5
– Compare with Canada
Continued…
• #5) May be partly because we have
more units of expensive technological
equipment per capita
– See exhibit #6
– Again compare Canada
• Less capital intensive
What is left as an explanation?
• The authors point to higher prices per unit
of medical service in the US
– Higher salaries
– Higher administrative costs of insurance
– Higher cost of capital inputs
– Compared to Germany in 1990: 40% more
spending per capita in US, for 15% less real
health care
Why?
• Less monopsony by purchasers in US
– Disaggregated buyers
• Many insurers for instance
• More monopoly by suppliers in US
– Concentrated providers
• Largely national competitors
– Though watch for Indian surgery and radiology soon
• AMA, Med Schools, Hospitals, big pharma
Continued…
• #5) May be partly because we have more
units of expensive technological
equipment per capita
– See exhibit #6
– Again compare Canada
• Less capital intensive
What is left as an explanation?
• The authors point to higher prices per unit
of medical service in the US
– Higher salaries
– Higher administrative costs of insurance
– Higher cost of capital inputs
– Compared to Germany in 1990: 40% more
spending per capita in US, for 15% less real
health care
Why?
• Less monopsony by purchasers in US
– Disaggregated buyers
• Many insurers for instance
• More monopoly by suppliers in US
– Concentrated providers
• Largely national competitors
– Though watch for Indian surgery and radiology soon
• AMA, Med Schools, Hospitals, big pharma