Sunday, July 23, 2017

The Price of Health Care

Even if you are only a little bit familiar with different health care systems in the world, you probably know that America spends more on health than any other country in the OECD in terms of both per capita and percentage of GDP. With such high spending, you would expect outcomes -- such as life expectancy or amenable mortality (basically preventable deaths) -- to be much better than other countries that spend less. Strangely, as data from a recent paper on the German health care system shows, this is not the case.
In spite of massive spending increases and a relatively high baseline in 2000, the US remains significantly behind other developed countries in terms of preventable deaths. On top of this, the improvement in amenable mortality for each dollar of new spending is a lot lower than the other countries.

This is where purchasing power parities (PPPs) come in. High prices for various health care related goods and services such as prescription medication or MRI scans could explain much of America's elevated health care costs, rather than high quantity/quality of care. If this were the case, that would explain why American health care spending continues to rise rapidly without significant improvement in outcomes.

Finding PPP data for different countries would shed light on this because it would give us a good comparison of the quantity of health care that each country consumes as opposed to the amount of money it spends. If the quantity of health care per capita in the US was similar to or less than other countries, then that would explain the lackluster outcomes it experiences.

Until recently there was no data that I could find for health care specific PPPs outside of Europe, but apparently in May the OECD and Eurostat published a report that updated the previous estimates with data from the US and a few other non-European countries. Figure 4 in the report shows that higher prices explain some, but by no means most of all, of the discrepancy between outcomes and spending in the US health care system.
Alternative explanations as to why quality of health care lags spending so much in the US are necessary. Wasteful spending brought on by the gratuitous use of expensive tests and procedures and drugs probably makes a big difference here. Also, if there was a single payer insurance market, the government would have a significant amount of leverage in lowering prices, but it's unclear how much can be gained from fixing incentives and switching to single payer.

Health care spending in America is also highly concentrated among high spenders, suggesting that programs that increase spending on people who currently don't have insurance (and therefore don't spend much right now) won't necessary do much to solve the problem. Reducing total spending might require curtailing superfluous spending on things like cosmetic surgery and rationing expensive procedures that many people depend on.

Ultimately, the US has a lot to gain from health care reform that increases coverage and -- hopefully -- reduces costs, but we should all be wary of thinking we can get a free lunch on health care.

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