Rumors of our expenditures have been greatly exaggerated
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America generally suffers in health care comparisons with our developed competitors - especially when it comes to spending, where the U.S. is portrayed as an inefficient outlier. The mismatch between costs and outcomes is then used to justify increased government intervention in U.S. health care markets. 

In this first of a series of posts on U.S. health care metrics, we'll take a look at how current comparisons are often misleading, where the U.S. health care system may be inefficient, and finally what policy solutions are available for improving U.S. health system performance, without wrecking what the U.S. does well - developing innovative new drugs and diagnostics.

"We spend too much." That's the constant refrain from many health care experts.

Whether on a per-capita basis or in absolute terms, we are constantly reminded that the US leads the developed world in health expenditures - evidence of our broken and inefficient healthcare arrangements. Take this figure, from a 2011 OECD report, which finds that the U.S. spends more than twice the OECD average on health care.


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Source: HEALTH AT A GLANCE 2011: OECD INDICATORS © OECD 2011, p. 149

The trouble is that this figure only tells part of the story. In his recent book, American Health Economy Illustrated, Duke University scholar Christopher Conover explains how comparisons using traditional measures of Purchasing Power Parity adjusted-GDP (GDP PPP) tend to exaggerate the differences in health spending between other countries and the US. Conover writes that:

"Health PPP in US dollars is lower than GDP PPP for all OECD members; thus the widely reported cross-national health spending dollars (calculated using GDP PPP) greatly exaggerate the true differences in health resource use between the United States and other nations." p.8

Essentially, PPP allows us to standardize the purchasing power of different currencies using one metric. The widely used GDP PPP (or USD PPP) figure takes into account prices across the entire economy, which in the US, are generally lower. However, US health care prices are on average 25% higher than other OECD countries - this means that any difference in health expenditures measured using GDP PPP overstates the difference. Conover offers a more realistic comparison:

healthexpend_oecd_ppp.png
Source: American Health Economy Illustrated p. 9

Using 2007 numbers, Conover's analysis brings the difference between the US and Norway down to 18%, from an incorrectly calculated 50%. 

Critics would argue that these higher prices are evidence in and of themselves of the failures of our system and the virtues of the single-payer model - we will address these unfounded criticisms in later posts.

By using health-spending adjusted PPP, the differences between the US and other OECD countries is much less pronounced than those sounding the seventh trumpet would like us to believe.

Even by this measure, however, we retain our leadership. In coming posts we will address the deeper issues - Do we get better or worse health outcomes for our spending? What drives the increase in spending? And, finally, is more government control the only way we address our health care challenges?


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3 Comments

Your heading says it all.

It's not rumor but statistical fact by what ever measurement - US$ or % of GDP both actual and adjusted for PPP. Your medical costs are on average are twice that of other developed countries. All for lesser health outcomes with the sole exception of cancer treatment.

The Irony is Government in one form or another through Medicare, Medicaid, the Armed Forces, Federal, State and Municipal employees etc currently pays 50% of the US health costs.

Do the maths - You should already have universal health coverage on what the Government alone spends.


So on the one hand, the argument says that when we consider our PPP for the US$ using a broad measure, e.g. a broad basket of goods and services, the prices Americans pay is generally lower than the OECD. But for the case of health care our prices are 25% higher. Accordingly, our dollar has less purchasing power compared to other countries when buying health care goods and services but more purchasing power when buying other goods and services generally. So this is what Conover means when he says “Health PPP … is lower than GDP PPP. This leads Conover to feel that the calculation unfairly biases the comparison between US and the OECD countries.

But does it? On an intuitive basis, the fact that health care prices are anomalously high compared to the majority of our other living costs is really the point. We feel it! As a technical point, it can’t make sense to normalize everything individually. What sense does health PPP or automobile PPP make. On that basis, everything would be at parity, because I would be comparing the prices of exactly the thing I used to normalize price parity. The only reason he does not come this obvious result is that he compares health care prices (presumably this means what the services cost from the providers) whereas total expenditures are what is paid out. Until Obamacare, there was no regulation on how much of our health care insurance premium actually when to pay for medical services. This now is required to be in the range of 80-85%.

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