The US spends far more on health care as a percentage of GDP than any other industrial country in the world.
The following articles from an expert in health economics help us to understand why. This will help guide a reasonable policy discussion of the subject.

November 14, 2008, 7:30 AM NYTimes
By UWE E. REINHARDT
Uwe E. Reinhardt is an economist at Princeton.
The graph below tells a compact story of United States health spending relative to that of other nations.
Shown on the horizontal axis is the gross domestic product per capita in 2006. The vertical axis represents 2006 health spending per capita. The data points in the graph represent two dozen developed countries that are members of the Organization for Economic Cooperation and
Development (O.E.C.D.).
Source: Uwe Reinhardt
The data are expressed in Purchasing Parity Dollars (PPP$). This metric is designed to adjust for cross-national differences in the purchasing power of national currencies relative to the real goods and services. One can think of PPP$s as dollars that buy roughly the same basket of real goods and services in different countries.
You’ll notice that there is enormous variation in health spending per capita in different countries within the O.E.C.D. But the graph also indicates that there exists a very strong relationship between the G.D.P. per capita of these countries (roughly a measure of ability to pay) and percapita health spending. The dark line in the graph is a so-called regression equation (whose precise mathematical form is shown in the upper left corner).
That line tells us something important about the relationship between a country’s wealth and its health care spending.
Just knowing the G.D.P. per capita of nations helps us explain about 86 percent of the variation

in how much different countries pay for health care for the average person. Canada, for example, on average spent only PPP$3,678 on health care per person in 2006, which is about 55 percent of the amount the United States paid per person. But Canada’s G.D.P. per capita in 2006 was also smaller than the comparable United States figure, although not that much smaller (it was 84 percent of the American level).
The line helps us estimate that roughly $1,141 of the $3,036 difference between Canadian and
American health spending per capita – or 38 percent — can be explained by the underlying difference in G.D.P. per capita alone.
An additional insight from the graph, however, is that even after adjustment for differences in
G.D.P. per capita, the United States in 2006 spent $1,895 more on health care than would have been predicted after such an adjustment. If G.D.P. per capita were the only factor driving the difference between United States health spending and that of other nations, the United States would be expected to have spent an average of only $4,819 per capita on health care rather than the $6,714 it actually spent.
Health-services researchers call the difference between these numbers, here $1,895, “excess spending.” That term, however, is not meant to convey “excessive spending,” but merely a difference driven by factors other than G.D.P. per capita. Prominent among these other factors are:
1. higher prices for the same health care goods and services than are paid in other countries for the same goods and services;
2. significantly higher administrative overhead costs than are incurred in other countries with simpler health-insurance systems;
3. more widespread use of high-cost, high-tech equipment and procedures than are used in other countries;
4. higher treatment costs triggered by our uniquely American tort laws, which in the context of medicine can lead to “defensive medicine” — that is, the application of tests and procedures mainly as a defense against possible malpractice litigation, rather than as a clinical imperative.
There are three other explanations that are widely — but erroneously — thought among nonexperts to be cost drivers in the American health spending. To wit:
1. that the aging of our population drives health spending
2. that we get better quality from our health system than do other nations, and
3. that we get better health outcomes from our system

November 21, 2008, 10:34 AM NYTimes
Why Does U.S. Health Care Cost So Much? (Part II: Indefensible Administrative Costs)
By UWE E. REINHARDT
Uwe E. Reinhardt is an economist at Princeton.
In my previous blog post, I showed that America suffers from “excess spending” in its health care system. Here I will discuss one factor that drives up that spending: indefensibly high administrative costs.
To review: “Excess health spending” in this context refers to the difference between what a country spends per person on health care, and what the country’s gross domestic product per person should predict that that country would spend. (The prediction is based on trends in other countries in the Organization for Economic Cooperation and Development.) The word “excess” here should not be taken as “excessive” unless one could demonstrate that what the other
O.E.C.D. nations spend is appropriate and what we spend is ipso facto wasteful.
The United States spends nearly 40 percent more on health care per capita than its G.D.P. per capita would predict. Given the sheer magnitude of the estimated excess spending, it is fair to ask
American health care providers what extra benefits the American people receive in return for this enormous extra spending. After all, translated into total dollar spending per year, this excess spending amounted to $570 billion in 2006 and about $650 billion in 2008. The latter figure is over five times the estimated $125 billion or so in additional health spending that would be needed to attain truly universal health insurance coverage in this country.
One thing Americans do buy with this extra spending is an administrative overhead load that is huge by international standards. The McKinsey Global Institute estimated that excess spending on “health administration and insurance” accounted for as much as 21 percent of the estimated total excess spending ($477 billion in 2003). Brought forward, that 21 percent of excess spending on administration would amount to about $120 billion in 2006 and about $150 billion in 2008. It would have been more than enough to finance universal health insurance this year.
The McKinsey team estimated that about 85 percent of this excess administrative overhead can be attributed to the highly complex private health insurance system in the United States. Product design, underwriting and marketing account for about two-thirds of that total. The remaining 15 percent was attributed to public payers that are not saddled with the high cost of product design, medical underwriting and marketing, and that therefore spend a far smaller fraction of their total spending on administration.
Two studies using more detailed bilateral comparisons of two countries illustrate even more sharply the magnitude of our administrative burden relative to that in other developed countries.
One of these is an earlier McKinsey study explaining the difference in 1990 health spending in
West Germany and in the United States. The researchers found that in 1990 Americans received
$390 per capita less in actual health care but spent $360 more per capita on administration.
A second, more recent study of administrative costs in the American and Canadian health systems was published in 2003 by Steffie Woolhandler and David Himmelstein in The New

England Journal of Medicine in 2003. The study used a measure of administrative costs that includes not only the insurer’s costs, but also the costs borne by employers, health-care providers and governments – but not the value of the time patients spent claiming reimbursement. These authors estimated that in 1999, Americans spent $1,059 per capita on administration compared with only $307 in purchasing power parity dollars (PPP $) spent in Canada.
More and more Americans are being priced out of health care as we know it. The question is how long American health policy makers, and particularly the leaders of our private health insurance, can justify this enormous and costly administrative burden to the American people and to the harried providers of health care.

December 5, 2008, 6:00 AM NYTimes
Why Does U.S. Health Care Cost So Much? (Part III: An Aging Population Isn’t the
Reason)
By UWE E. REINHARDT
Uwe E. Reinhardt is an economist at Princeton
Not a conference on health care goes by without someone’s asserting that the aging of our population is a major driver of the annual growth in health spending. It sounds intuitively appealing if one contemplates the following two graphs, which are regularly trotted out on such occasions.
Graph courtesy of Uwe Reinhardt.
Graph courtesy of Uwe Reinhardt.
The first graph depicts what is commonly described as the “Baby Boom Tsunami.” The second depicts age-specific health spending per capita in 1999, relative to the spending of Americans in

the age group 35 to 44, which is set to 1. These age-specific relative spending profiles do not change much over time for a given country, and they do not much differ among industrialized nations. They show that after age 60 or so, health spending per capita rises sharply with age.
Yet, research around the world has shown that the process of the aging of the population by itself adds only a very small part – usually about half a percentage point — to the annual growth in per-capita health spending in industrialized societies, which tends to range between 5 and 8 percent, depending on the country and the period in question. The bulk of annual spending growth can be explained by overall population growth (about 1.1 percent per year), increases in the prices of health care goods and services, and the availability of ever more new, often highcost medical products and treatments used by all age groups.
Because this proposition is so counterintuitive, readers may wish to consult two recent research papers on the topic, one penned by the present author, and the other penned by other researchers.
These papers are based on American data. Similar studies have appeared also for Canada,
Australia and many other countries in the Organization for Economic Cooperation and
Development. Indeed, it may surprise readers that knowing the percentage of a nation’s population that is over age 65 cannot help one explain cross-national differences in health spending per capita, as is shown in the graph further on. As the graph shows, the per-capita health spending of nations is virtually independent of the age structure of its population.
Graph courtesy of Uwe Reinhardt.
Why, then, is the aging of the population such a small driver of annual increases in health spending? The answer can be found in the last graphical display of this commentary. That graph contains the same data as the first graph in this commentary, but the vertical axis is scaled as it should be scaled: from 0 percent to 100 percent. Letting it run from 12 percent to 22 percent stretches the vertical axis and creates the image of the famous Baby Boom Tsunami. It is a form of lying with statistics.

Graph courtesy of Uwe Reinhardt.
As this graph illustrates, the aging of our population is a very gradual process and does not come even close to resembling a tsunami. It is at best a demographic ripple.
Furthermore, current population projections have the fraction of elderly in the United States population peak at around 20 percent. Along with Canada and Australia, we shall be for a very long time the youngest nation in the O.E.C.D. Only in 2025 will the American population be as
“old” as many European populations are already today.
As the song goes, relative to other nations we shall be “forever young”!