So why DOES U.S. health care cost so much? A look at the myths and realities

By Julie Mack | jmack1@mlive.com

KALAMAZOO, MI -- U.S. health-care reform is an issue fraught with emotion right now, one of those topics where a civil conversation between the two sides is barely possible.

Just look at the comment thread to a column posted on mlive.com headlined "Republicans have ideas on health-care reform -- but in the context of health care as a privilege, not a right."
But on one point, there seems to be consensus on both sides: Health-care costs are too high, and need to be brought down.

In 2010, the United States spent $2.6 trillion on health care, about 18 percent of our Gross Domestic Product. We easily outspend other countries; relative to GDP, we're about 50 percent more than the No. 2 country, which is Norway.

So why DO we spend so much compared to other nations?

First, let's dispel some myths.

Myth No. 1: We have the best health-care system in the world.  Especially considering the money we spend, our outcomes are decidedly mixed. In a 2011 report by the Organization for Economic Co-operation Development, the United State ranked 27th in life expectancy. The report found  our cancer survival rates are higher than average, but compared to other developed countries, we're more likely to die of heart disease and we have a not-good track record on treating chronic diseases such as asthma.

Incidentally, the idea that people come to the U.S. from all over the world for health care? Probably because our health care is so expensive, the U.S. is missing from the list of top destinations for medical treatment, and an estimated 650,000 Americans in 2009 checked into foreign hospitals in search of more affordable care.

Myth No. 2: Health care is heavily rationed in other countries, which means Americans use more health-care services. We do rank high in use of some tests and serves, but overall the OECD report ranks  the U.S. 30th out of 34 developed countries in number of average doctor visits per year and 23rd in number of hospitalizations. Also, a 2010 survey by the Commonwealth Fund found that while Americans have better-than-average access to specialists, we lag compared to other countries in getting immediate access to a doctor when we're sick and we're much more likely forgo heath care because of costs.

Myth No. 3: The U.S. has to spend more on health care because we're fat and refuse to exercise.  It's true America leads the world in obesity rates. It also is iabsolutely true we could lower health-care costs by taking better care of ourselves. But it doesn't explain the gap in health-care spending between the U.S. and other countries, which have their own health-behavior issues. Consider that for two other risk factors -- smoking and drinking -- the U.S. compares very well, according to the OECD report. We also have a younger population than countries such as Japan, France and Germany, which drives up their costs.

Myth No. 4: Tort reform would go far in bringing down U.S. health-care costs.  A 2009 study by the nonpartisan Congressional Budget Office found that implementing Republican plans for tort reform would reduce U.S. health care spending by 2 percent. So would tort reform lower health-care costs? Yes. By a lot? No. 

 

Source: Kaiser Family Foundation

 

Myth No. 5: It's government spending that drives up health-care costs.  Actually, in the case of health care, it appears the public sector is better able to deliver quality service at a lower price. It's no secret that Medicare and Medicaid pay lower rates for services than private insurance. A 2010 CBO report indicates that the Veterans Administration health system and Medicare have done a better job of controlling costs than the private sector, and their patient satisfaction rates are higher. There's also the comparison between the U.S. and other countries: Much more than other nations, the U.S. health-care system is driven by free-market forces and has less government regulation on controlling prices. Yet the gap between health-care expenditures in the U.S. and other countries has only widened.

Moving on from the myths, let's look at the real factors driving up costs.

1. The U.S. health-care system charges considerably more than other countries from comparable services and products.
A 2011 report by the International Federation of Health Plan provides ample examples. In 2007, the average cost of an appendectomy was $7,962 in the U.S., $5,004 in Canada and $2,943 in Germany. A coronary angioplasty averaged $14,378 in the U.S., $9,296 in Sweden and $7,027 in France. An MRI averaged $1,009 in the U.S., $304 in Canada and $187 in Britain.

"High prices are the main reason for high health care spending in the United States,"
Matthias Rumpf from the OECD told PBS Newshour in a November 2011 interview. "The same set of hospital interventions -- including the normal delivery of a baby, a Caesarean section, a hip or knee replacement, etc. -- cost 60 percent more in the United States than in a selection of other countries. Similarly, 50 high-selling pharmaceuticals cost 60 percent more in the United States than in Europe."

2. The U.S. system uses more expensive interventions versus lower-cost primary or preventive care.
In his PBS interview, Rumpf cited this as a secondary factor driving U.S. health-care costs, pointing to the fact that the number of tonsillectomies, knee replacements, hip replacements, coronary grafts, Caesarian sections, MRI and CT diagnostic tests,, among other procedures, are much higher in the United States than in most other countries.

"It is probable that the medical culture in the United States is more likely to 'do something' than in other countries -- yet overall health outcomes are not better in the United States," Bumpf said.

Meanwhile, said Bumpf, the U.S. has an "underdeveloped" primary-care system -- i.e., "the network of family doctors and clinics that people can go to when they first think they have a health problem and that can advise people on how to stay healthy."

He added:

This is bad for people's health, but also raises overall costs. For example, most people with diabetes, asthma or difficulties in breathing should not need to be treated in hospital. They require monitoring, but this does not need to happen in hospitals, it is something that the primary care system should manage. It is far cheaper for a family doctor to check that people are following their treatment properly and that it is appropriate, than for things to go wrong and someone to be admitted to hospital as an emergency. Greater attention to the primary care system is urgently needed in the United States.

Here's an example: Americans are 45 percent more likely to undergo angioplasty and heart bypass surgery than residents of Norway, which ranks second, according to a 2008 article in the Journal of the American Medical Association.

Yet the U.S. mortality rate for heart disease is 41 percent higher than Norway’s and 20 percent higher than the average among developed countries.

Meanwhile, one of the most effective treatments for coronary artery disease is not surgical interventions, but regular exercise and a diet heavy on fruits and vegetables.

One reason for Americans' more aggressive approach is our health-care reimbursement system, which leads us to ...

3. The fee-for-service payment model.

Most U.S. bills are based on services provided -- and the more services, the bigger the bill.

"In effect, fee-for-service is open-ended: It's like going to an auto mechanic and agreeing to pay for whatever services he deems necessary, at whatever price he chooses, with no penalties to the provider if the service is poor," wrote Charles Hugh Smith in a post for dailyfinance.com.

"The fee-for-service model provides powerful incentives to pad bills or even commit fraud," Smith wrote. "Not only does the fee-for-service model offer perverse incentives to providers, it also offers no incentives for patients to skip unnecessary procedures, or to seek lower-cost service."

4. Higher wages for doctors and greater use of specialists.

A 2011 Columbia University study concluded that a "major factor" in the high cost of U.S. health care is the fact that American doctors earn considerably more than their counterparts in other developed countries, and Americans are more likely to use high-paid specialists.

In all, the study found "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," said a Forbes.com post that summarizes the study.

Here's an excerpt from a New York Times report on the study's conclusion:

The difference (in spending on physicians) results mainly from higher fees, not from higher costs of the doctors’ medical practice, a larger number or volume of services or higher medical school tuition.

Among primary care doctors, those in the United States had the highest annual pretax earnings after expenses — an average of $186,582 in 2008 — while those in Australia and France had the lowest earnings, $92,844 and $95,585.

"Among orthopedic surgeons, those who had the highest annual pretax incomes, net of expenses, were in the United States,” with an average of $442,450, the study said. In Britain, which ranked second, the comparable figure was $324,138. Annual pretax earnings of orthopedic surgeons in the other countries were less than $210,000.

The report also found that American patients had fewer but more expensive interactions with their doctors. For instance, it examined fees for basic office visits and for hip replacement surgery, and found that Americans were “very low users of office visits and relatively high users of hip replacement surgery.”

5. Fewer government regulations to control costs.

In his Wonkblog for the Washington Post, Ezra Klein explains how the free-market system in America can actually drive up costs:

In America, Medicare and Medicaid negotiate prices on behalf of their tens of millions of members and, not coincidentally, purchase care at a substantial markdown from the commercial average. But outside that, it’s a free-for-all. Providers largely charge what they can get away with, often offering different prices to different insurers, and an even higher price to the uninsured.

Health care is an unusual product in that it is difficult, and sometimes impossible, for the customer to say “no.” ....  In other cases, there is more time for loved ones to consider costs, but little emotional space to do so. ...  It is not like buying a television, where you can easily comparison shop and walk out of the store, and even forgo the purchase if it’s too expensive. And imagine what you would pay for a television if the salesmen at Best Buy knew that you couldn’t leave without making a purchase.

“In my view, health is a business in the United States in quite a different way than it is elsewhere,” says Tom Sackville, who served in Margaret Thatcher’s government and now directs the IFHP. “It’s very much something people make money out of. There isn’t too much embarrassment about that compared to Europe and elsewhere.”

The result is that, unlike in other countries, sellers of health-care services in America have considerable power to set prices, and so they set them quite high. Two of the five most profitable industries in the United States — the pharmaceuticals industry and the medical device industry — sell health care. With margins of almost 20 percent, they beat out even the financial sector for sheer profitability.

A 2009 post by Megan McArdle, economics editor for The Atlantic magazine, also makes the point that the American system is designed to spend more, not less:

Americans get shiny new facilities--my British colleagues once derisively commented that American hospitals are 'like hotels'.  American hospitals don't have open wards for almost anyone.  They staff at very high levels.  Doctors conduct an inordinate amount of tests.  We use an expensive machine rather than watchful waiting.  And often, those expensive machines catch conditions that never would have turned into anything, which we then treat.

6. High level of wasteful, inefficient spending.
Compared to countries with national health-care system, the American system is far more compartmentalized and involves more administrative costs.

Among those making that point is Dr. Donald Berwick, who headed  the federal Medicare and Medicaid programs from 2010 until last December.

In an interview with the New York Times on his last day on the job, Berwick estimated estimated Medicare and Medicaid could save $150 billion to $250 billion a year by eliminating waste, which he defined as “activities that don’t have any value.”

Berwick listed five reasons for what he described as the “extremely high level of waste.” They are overtreatment of patients, the failure to coordinate care, the administrative complexity of the health care system, burdensome rules and fraud.
“Much is done that does not help patients at all,” Berwick told the Times, “and many physicians know it.”
So what can be done to lower costs?

In his PBS interview, Bumpf made the point that "no countries have brought down costs -- health care costs are rising everywhere ... so the real issue is whether other countries are providing good quality care at lower costs than the United States."

He listed elements common to the high-performing health systems:

• An emphasis on primary care, to ensure that most care takes place outside of hospitals
• A system which encourages use of generic drugs, when there are alternatives to expensive brands
• Tight regulations of prices and fees, for at least those services that are paid for by public programs
• Adherence to clinical guidelines, so that excessive use of expensive diagnostics or unnecessary health care is prevented

 source