The 3 Key Drivers of High Healthcare Costs

Health economist and management consultant  Sarasohn-Kahn highlights on Health Populi why US health care costs are the highest in the world. The U.S. devotes  a whopping 17.4% of the national economy to health spending, amounting to about $8,000 per person, vs. for the UK about 10%; Germany 11.6%, France, 11.8%, Australia 8.7%, and Japan, 8.5%.
According to The Commonwealth Fund‘s latest analysis in their Issues of International Health Policytitled, Explaining High Health Care Spending in the United States: An International Comparison of Supply, Utilization, Prices, and Quality, published in May 2012, these are the key drivers of higher health spending in the U.S.:
  • The price of physician services.
  • Proliferation of clinical technology.
  • The cost of obesity are the key drivers.

I. Medical Services

2006 health care spending: 76% due to Medical Services, Drugs and Devices

1. Primary care doctors:

Primary care doctors in the U.S. earn about $186,000 a year, compared with Australian colleagues who bring in about $92K a year, French peers at $96K per annum, Canadian PCPs earning $125,000, Germans at $131K, and British earning $160K.

For specialists, like orthopedic surgeons, the pay gap between doctors in the U.S. and colleagues overseas is much greater: Orthopods earn $442,000 in the U.S. compared to British orthopedists earning $324K per annum, Canadians at $209K, Germans at $202K, Australians with $188K, and French, at $154K.

According to International Federation of Health Plans, the U.S. is in the 95th percentile in fees for routine office visits.

2. Hospital prices:

Hospital costs are also highest in the U.S. The U.S. hospital discharge cost is about 3 times that of other developed countries. The US has consistently higher prices than any other country surveyed by the International Federation of Health Plans. Their report consists of 23 pricing measures and the pattern is the same across the board. As shown in the chart, the US is in the 95th percentile of hospital costs.

Per discharge, the average patient spend is as follows:

  • US: $18,142;
  • Germany: $5,072
  • OECD median: $6,222.

3. Prescription drug prices:

Prescription drugs in the U.S. cost more than in any other country in the OECD. Prices for the 30 most commonly prescribed drugs in 2006-7 were indexed at 1.0 for the U.S. vs. other OECD nations. Compared to the U.S.:

  • OECD median: 0.51
  • New Zealand: o.34
  • France: 0.44
  • Australia: 0.49
  • Canada (#2): 0.77.

AARP calculated that the average retail price for brand name prescription drugs used by Medicare enrollees grew much faster than average price inflation between 2008 and 2009 — in fact, inflation fell by 0.3%, while the prices for the most widely used brand name Rx’s grew by 8.3% over the year, according to AARP’s Rx Price Watch Report.

Pharmaceutical companies’ marketing through doctors raises important questions.  The fact that the companies have been raising retail prices on seniors’ heavily-consumed prescription drugs contributes to the continued skepticism about pharmas as health care partners for patients. Consumer Reports Health Blog published findings on August 24, 2010 that consumers say big pharma influence on docs is concerning.

II. Technology

The U.S. has an above-average number of MRIs, CT scanners, PET scanners, and mammographs. Utilization and prices per scan, too, are greater in the U.S. than in other OECD countries.

“This combination of pervasive medical technology and high prices showcases two potent drivers of U.S. health spending, and a possible explanation for the outsized share of resources we dedicate to health care relative to the rest of the world,” the Fund states in the report.

III. Obesity

The newest aspect of health spending driver is obesity: the U.S. wins the global obesity contest:

  • US: 34% score a BMI over 30.
  • New Zealand (the next most-obese nation): 26.5%.
  • Australia: 24.8%.
  • Canada: 24.2%.
  • UK: 23%
  • Other countries studied: fewer than 20%.
  • The leanest live in Switzerland and Japan, according to the latest OECD health database.

Higher Spending Does Not Mean Better Outcomes

With all that health spending, health outcomes in the U.S. don’t always rank at the top of the OECD.

Good News: The U.S. ranks higher for breast cancer and colorectal cancer survival (along with Norway).

Bad News: However, the U.S. ranks lower than median OECD for cervical cancer. The U.S. also has higher than average rates for conditions amenable to treatment (discussed here in Health Populi) such as asthma, diabetes (measured by lower-extremity amputations per 100,000 people) and cardiac disease.

Eventual Price Regulation is Inevitable

The Commonwealth Fund calculates that if the U.S. spent the same rate on health care as in Japan, the U.S. would save $1.25 trillion a year — more than the U.S. defense budget. And Japan has a fee-for-service system with no restrictions on specialists and hospital choice, as well as advanced medical technology.

Why is Japan doing so much better? Japan regulates health prices. The market can’t do this on its own. Instead, higher prices for health services mean that people who can’t afford services opt out, which ultimately results in even higher critical care costs for chronic conditions down the road.

The ACA expands coverage and has minimum provisions for prevention, which are good first steps. The Centers for Disease Control in Atlanta reports that 50 years ago 10% of the population was chronically ill; now that number has grown to 53% and is expected to continue to rise.  Yet, while about 80% of these diseases are/were preventable, we only spend 5% of all health care dollars on prevention.

However, the ACA doesn’t regulate prices because, so far, there has been no the political will to address the real drivers of healthcare costs. Eventually, there will be no choice. As healthcare continues to consume a greater share of GDP, as shown below, the problem will reach a point of fiscal crisis, the like of which the nation has never seen.

In the March 19, 2011 issue of The Economist Sir John Oldham of the British National Health Service predicted  in an article entitled “Patient, Heal Thyself” that America will spend 100% of its GNP on health care by 2065 if current trends continue, including alarming increases in chronic diseases such as diabetes, heart disease, arthritis and asthma – in combination with runaway price increases.  According to Forbes, health costs are by far the biggest threat to the nation’s fiscal health in the long run. They write:

Health spending can’t continue to grow way faster than the economy forever. It can’t, because that would mean that health spending will eventually consume most of the gross domestic product. Obviously, that isn’t going to happen. Something is going to have to happen to slow down health spending. The question is whether Americans are going to take hard steps to rein it in before it crimps American economic competitiveness.

Cost Controls: Too Politicized To Pass – For Now

The cost-control board portion of President Obama’s landmark Affordable Care Act was rejected by the Energy and Commerce Health subcommittee in a vote of 17-5 before the bill was sent to the full committee for a vote and then on to the House:

The Energy and Commerce Health subcommittee vote was 17-5, with ranking member Frank Pallone Jr. (D-N.J.) and Rep. Edolphus Towns (D-N.Y.) crossing the aisle to vote for repeal of the Independent Payment Advisory Board. There were no amendments.

A 15-member board was proposed to recommend provider payment cuts if Medicare costs grew faster than a targeted rate, while Congress could propose its own equivalent savings with a simple majority or overturn the recommendations with a supermajority. Although the board would have been prohibited from making recommendations related to rationing care, reducing benefits, raising premiums, and so forth, it was dishonestly labeled a “death panel” and a “rationing board” by Republicans for purely political purposes. Ironically, Republicans had voted in the prior year for a budget plan that would have replaced Medicare entirely.

Even more ironic is that the low life expectancy that American currently enjoy shows that increased medical costs do not lead to better health outcomes.

 Dramatic action is needed, and the government is the only source for the changes that are needed.  The pharmaceutical companies will not change.  The medical profession will not change.  The insurance industry will not change.  The food industry will not change.  The citizens will not change.  This has been proven over and over again for more than 50 years.  Each of these groups has had ample opportunity to reform themselves and reign in the cost of health care.

It is my hope that articles like this will help Americans better appreciate the real facts and come to a more realistic assessment of the necessary changes that will eventually, inevitably have to happen.