When businesses think their costs are high and uncompetitive, they
use a practical tool called benchmarking: they compare their costs and
quality to peers and determine where the difference (“gap”) arises, and
why. Yet, for all the attention health care has received in recent
years, there is little understanding in the popular discourse of why U.S. costs are so high.
So I did a little digging. No surprise, academics and other analysts have worked on this. I found comparative analyses of health care costs from the New York Times, HealthAffairs.org, New England Journal of Medicine, McKinsey, and professors at Princeton, Dartmouth, and Columbia. They vary in methodology and perspective; however, they provide a good sense of where the gap is and why.
The U.S. spent about $7,000 per capita in 2008 on health care. Peer
countries, like Japan and the U.K., spend about half that amount and
achieve equally good results, as measured, for example, by life
expectancy at birth. That comparison is captured in the famous Mary
Meeker graph, Chart 1. It shows that the gap is about $3,500 per person
in the U.S. ($1.1 trillion for the 305 million U.S. residents).
The sources of difference:
1. U.S. spending annual on physicians per capita is about five times higher than peer countries: $1,600 versus $310 in a sample of peer countries, a difference of $1,290 per capita or $390 billion nationally, 37% of the health care spending gap. These conclusions come from an analysis co-authored by Miriam Laugesen of the Columbia University School of Public Health and Sherry Gleid, an Assistant Secretary in the U.S. Department of Health and Human Services (source)**. The biggest driver of the gap is spending with specialist doctors, which is 3-6 times higher in the U.S. versus peers. This difference is mainly due to much higher prices in the U.S., which are driven by both higher per-procedure rates paid by both public and private payers, and larger proportion of higher-paying private payers in the U.S. By comparison, public per visit rates for U.S. primary care doctors are at the high end of the range for peer countries and private rates are slightly above the range, and primary care doctor incomes are higher than peer countries, but less than half of the incomes of U.S. specialists. Primary care doctor utilization is comparatively low in the U.S., which keeps overall spending on primary care down. This is not good for overall health care costs, however (more).
Laugesen and Gleid conclude (in very circumspect language, which I have translated here to plain English) that the physician spending gap exists because mainly because CMMS*, which sets U.S. Medicare and Medicaid rates, pays much more for specialist services relative to primary care services than government authorities in peer countries; private insurers have done a poor job of negotiating rates with specialists; and it may be necessary to pay incomes to specialists at or near the “1 percent” level to attract them from other well-paid occupations. I think the last argument is strained. Laugesen’s data shows that there is no shortage of specialists in the U.S. (which might necessitate high prices), and there is no evidence that the people who become medical specialists could achieve the same economic status in other walks of life.
So I did a little digging. No surprise, academics and other analysts have worked on this. I found comparative analyses of health care costs from the New York Times, HealthAffairs.org, New England Journal of Medicine, McKinsey, and professors at Princeton, Dartmouth, and Columbia. They vary in methodology and perspective; however, they provide a good sense of where the gap is and why.
Chart 1. Graph via Mary Meeker of KPCB
The sources of difference:
1. U.S. spending annual on physicians per capita is about five times higher than peer countries: $1,600 versus $310 in a sample of peer countries, a difference of $1,290 per capita or $390 billion nationally, 37% of the health care spending gap. These conclusions come from an analysis co-authored by Miriam Laugesen of the Columbia University School of Public Health and Sherry Gleid, an Assistant Secretary in the U.S. Department of Health and Human Services (source)**. The biggest driver of the gap is spending with specialist doctors, which is 3-6 times higher in the U.S. versus peers. This difference is mainly due to much higher prices in the U.S., which are driven by both higher per-procedure rates paid by both public and private payers, and larger proportion of higher-paying private payers in the U.S. By comparison, public per visit rates for U.S. primary care doctors are at the high end of the range for peer countries and private rates are slightly above the range, and primary care doctor incomes are higher than peer countries, but less than half of the incomes of U.S. specialists. Primary care doctor utilization is comparatively low in the U.S., which keeps overall spending on primary care down. This is not good for overall health care costs, however (more).
Laugesen and Gleid conclude (in very circumspect language, which I have translated here to plain English) that the physician spending gap exists because mainly because CMMS*, which sets U.S. Medicare and Medicaid rates, pays much more for specialist services relative to primary care services than government authorities in peer countries; private insurers have done a poor job of negotiating rates with specialists; and it may be necessary to pay incomes to specialists at or near the “1 percent” level to attract them from other well-paid occupations. I think the last argument is strained. Laugesen’s data shows that there is no shortage of specialists in the U.S. (which might necessitate high prices), and there is no evidence that the people who become medical specialists could achieve the same economic status in other walks of life.
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