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Commentary

Adding up the reason's for expensive health care
Steven Pearlstein, Washington Post, 2-14-07

Pearlstein reports on a study from McKinsey and Co. examining why the U.S. spends more on health care than any country in the developed world:

The study aimed to determine why the United States spends nearly double the average of other industrialized countries on health care—with no better, and in some cases inferior, medical outcomes. Even after adjusting for wealth, population mix and higher levels of some diseases, McKinsey calculated that we spend $477 billion a year more on health care than would be expected if the United States fit the spending pattern of 13 other advanced countries. That staggering waste of money works out to 3.6 percent of the nation's entire economic output, or $1,645 per person, every year.

In laying out with remarkable clarity how and where we overpay, the McKinsey report punctures myths, exposes common misconceptions and highlights realities long ignored in the health–care debate.

Let's start with one the American Medical Association hopes no one will notice, which is that American doctors make a lot more money than doctors elsewhere—roughly twice as much. The average incomes of $274,000 for specialists and $173,000 for general practitioners are, respectively, 6.6 and 4.2 times those of the average patient. The rate in the other countries is 4 and 3.2.

According to McKinsey, the difference works out to $58 billion a year. What drives it is not how much doctors charge per procedure, but how many procedures they perform and how many patients they see—a volume of business 60 percent higher here than elsewhere.

Included in the income figures is $8 billion physicians earn as investors in diagnostic labs and outpatient surgical clinics. The good news is that those private facilities charge 20 to 30 percent less than hospitals for what they do. But McKinsey found that they don't save the system any money because the doctors who invest in them wind up ordering more tests and surgeries than doctors who don't—in the case of tests, two to eight times more.

What we have here is pretty good circumstantial evidence of Pearlstein's First Law of Health Economics, which holds that if you pay doctors on the basis of how many procedures they do, and you leave it to doctors and their insured patients to decide how much health care they get, consumption of health services will rise to whatever level is necessary for doctors to earn as much as the lawyers who sue them.

Another way of phrasing Pearlstein's point is that the consumers of health care—the patients—are not the same people who pay for health care; this leads to overspending on treatments that may only have marginal health value—if any.

But no other country has found the magical solution to health care costs either—aging populations and increasing technology costs are problems in all developed nations. One solution is to make the government ration health spending. Another possibility is put consumers in the driver's seat and to let providers compete for the best mix of price and services. Before we try Europe's solution, why not try this one?



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