AMERICAN SPENDING ON MEDICAL CARE HAS SOARED WHILE ITS HEALTH HAS LAGGED
As an industry, the medical establishment in America is greater than the GDP of every country outside the U.S. except for five – China, India, Japan, Germany and Russia (as measured by respective cost of living - Purchasing Power Parity). The U.S. spends more on medical care than other country in the world by far, but it also spends far more on a per-person basis, and when adjusted for respective cost-of-living of each country. By nearly any yardstick, there is almost no other country that comes close to yearly U.S. medical spending or yearly increases in spending. This includes wealthy countries of Europe well known for their generous government spending and social programs. Yet, even compared to these wealthy, high-spending countries, on a per-person basis, the U.S. spends much more.
Researchers from The Commonwealth Fund looked at possible factors to explain the large gap in per-person medical spending between the U.S. and 10 other wealthy countries - Japan, Switzerland, France, Canada, Netherlands, Sweden, Austria, United Kingdom, Germany, and Denmark. After the U.S., these 10 countries are at or near the top among the highest-spending countries on medical care in the world. But even compared to these heavy healthcare spenders, the U.S. spends much more, and with generally worse health outcomes than each of these countries. Each of these lower-spending countries have citizens with higher average longevity than in the U.S. and rank higher on most other health measures, such as those measured by Bloomberg's Healthiest Country Index. In its 2019 ranking, the U.S. now ranks 35th, far behind these other wealthy countries, as well as behind many low and moderate-spending countries, such as Czech Republic, Croatia and Chile.
This spending area of government administration is an area where the U.S. spends much more than other countries, even wealthy ones. The Commonwealth Fund estimated that spending on “governance/administration” was 8% of total medical and healthcare spending in America versus an average of 3% for these other high-spending countries. With $3.5 trillion a year in medical costs, compared to these other wealthy and high-spending countries, the U.S. is overspending by at least $175 billion a year in wasted government administrative costs alone. This estimate of government administration waste is more than the total amount of medical spending in Spain, a population of 47 million, and which outlives the U.S. population by an average of more than 4 years. (It should also be noted that many estimates for bureaucratic waste/administrative costs/fraud in the U.S. are much higher, with some estimates surpassing a trillion dollars a year.)
According to the CMS, expenses in another category of healthcare spending - “Government Public Health Activities – accounted for almost $90 billion of yearly spending in 2017. Such spending hardly existed 35 years ago. Government agencies themselves seem to have a difficult time defining exactly what such Government Public Health Activities are but they seem to revolve around things like food and drug safety, “environmental monitoring”, immunization and vaccinations, disease prevention programs, and public health laboratories. This classification of medical spending doesn't even include things like personal health care services, government-funded health research, government spending on medical structures and equipment, “environmental protection”, emergency planning and other government-financed activities. However they are defined, spending in the areas of government administration and government public health activities have soared over the past few decades in the U.S. and are easily the highest of any country in the world.
HOSPITAL COSTS IN U.S. ARE OVER $1 TRILLION A YEAR
Yearly hospital spending costs in the U.S. are incredible. According to the American Hospital Association, $1.06 trillion was spent on U.S. hospitals in 2017. With an estimated 36 million hospital admittances that year, that works out to an average of almost $30,000 of revenues per patient. That average is inflated from the smaller number of patients in hospital long-term and/or with very serious or chronic conditions costing hundreds of thousands of dollars. Yet nearly all patient hospital stays result in thousands of dollars of revenues for medical centers and some will result in windfalls for them. Besides the financial gains for these corporations, and those related to them, the fact remains that expensive medical care is seen as an economic growth avenues for cash-strapped cities.
And yet despite the money spent in the medical system – the majority in hospitals - health outcomes in the U.S. aren't very good overall compared to other countries. Peterson-Kaiser's Health System Tracker compared the U.S. and other wealthy countries, including Germany, Austria, Netherlands, Sweden and Japan, by the age-adjusted mortality rate that could be treated by available health care (“amenable” treatment). The analysis (data from 2006-7) found that among comparable countries, the U.S. had the highest death rate, with a mortality rate among these treatable conditions more than 20% higher than comparable countries. The same study found that the age-adjusted disability rate in 2015 was higher than the other 11 wealthy countries studied, averaging 20%-25% higher than the combined group. Interestingly, the U.S. had an age-adjusted disability rate more than 40% higher than Japan, one with a wealthy and elderly population, and with a well-entrenched health-care system. Japan has an average longevity more than six years better than the U.S., and it also has much lower disability rates. The country accomplishes this while spending less than half as much (adjusted for respective cost-of-living) on overall healthcare as the U.S. does.
Overall, Kaiser calculates that from 1980 to 2015, the overall mortality rate in the U.S. fell 29%, but the improvement was barely half the 54% decline for the average comparable country. Worse, as I noted last time, and as the graph below shows, improvement in other countries has continued to steadily improve over the last decade, while in the U.S. it has stalled and even reversed course.
These administrative costs then become a large part of overall medical costs, in every product, service and hospital stay, inflating the costs for all. As the graph below shows (data is from several years ago, in 2012, so costs have gone up quite a bit since then), even compared to other wealthy and high-spending countries, U.S. daily hospital spending is in a class by itself.
Those high salaries and high levels of administrative costs represents an obstacle for patients hoping to find quality medical care at a reasonable price. In other countries, more reasonable hospital costs allow patients and citizens to more appropriately spread their financial resources around on avenues that improve overall health and welfare. This underscores the point that a much larger percentage of medical spending in other countries is on preventative care and healthcare, not disease care, as is the majority of medical spending in the U.S.
MEDICINE'S PRICE MECHANISM IS A MESS
The primary reason that hospital administrative costs are so high is because of the lack of transparency, competitiveness and price competition among hospitals. Conversely, we know there is little price competition because there is very low transparency of prices for hospital goods and services, and because very little of what is paid for in hospitals is paid-of-pocket by patients. Combining low transparency and the low out-of-pocket expenses results in a very small percentage of hospital spending in American that is paid up front and where patients are easily able to compare costs and services among competitors. With such factors in place, it is no surprise there has been continual price explosion (as well as general over-usage) in hospitals for the last few decades.
According to the National Health Interview Survey less than 10% of the costs of conventional physician care in America are paid out-of-pocket. According to data from the survey, Americans spend nearly a third as much out-of-pocket on “alternative” health treatments such as chiropractors, acupuncturists and massage therapists as they do on traditional medical care (about $15 billion versus about $50 billion a year, respectively) But such alternative healthcare represents only about 1% of total healthcare spending, so it's a significantly larger share of out-of-pocket expenses on healthcare. As a result, there is now much more price competition in alternative medical and healthcare treatments than among convention doctors and conventional medicine. A customer that wants a massage or chiropractic service can shop around. That customer can and will reject the service is the price isn't right. Such alternative nutrition, supplement and alternative treatments are nearly all paid out-of-pocket.
Over $300 billion is spent yearly on prescription medication in America, with just $50 billion of that paid out-of-pocket. Similarly, the survey reports that Americans spend about a quarter on dietary supplements out-of-pocket compared to what they pay out-of-pocket for prescription medication. And yet the total amount Americans spend (including payments via insurance and government) on prescription medication is at least 15 times that spent on dietary supplements. The vitamin supplement buyer can decide whether or not the product is worth the price. The sellers of these products and services must be competitive, with competitors and with customers, in providing services and products at attractive prices.
This is far from the case in traditional medicine and prescription medication. Almost all of traditional medical spending is hidden, and nearly all of what is paid out-of-pocket, is after those products or services have been purchased. If we think about the prescription medications seen advertised on television, or treatments available at American hospitals, there is almost never any reference to prices. These providers don't have to give such information. First, because Americans generally can't shop for medicine and treatment by price, only by service. And secondly, because the distributors of drugs and medical services often don't even know the up-front costs for the customer, with the costs only known to provider and patient after the service or product has been purchased, and often, not not until that expenses has wound its way through government or insurance reimbursement labyrinth.
The inevitable result is that providers will charge high prices to customers, since its customers are largely in the dark as to the costs of the medical products and services they buy, and/or the only relevant issue for the customer is his or her out-of-pocket costs. Given the underlying structure of low transparency, low out-of-pocket costs, and heavy insurance and government wall obscuring nearly every medical service, it cannot be puzzling why medical products and services cost so much. It would only be puzzling if they weren't.
Next time I will look a bit more at the drug industry in America, which for the most part, provides benefits for customers markedly smaller than the extraordinary costs incurred by them and taxpayers.