What Ezra Klein Missed in the OECD reports
Ezra Klein, of the Washington Post, writes about an Organization for Economic Cooperation and Development (OECD) report as follows:
“And here’s the shocker: Our government spends more on health care than the governments of Japan, Australia, Norway, the United Kingdom, Spain, Italy, Canada or Switzerland.”
Here is the slide that has so impressed him—
Yes, indeed, our government spends more than many other governments on health care. But, wait, there’s more—
“And it’s worse than that: Atop our giant government health-care sector, we have an even more giant private health-care sector. Altogether, we’re spending about 16 percent of the GDP on health care. No other country even tops 12 percent. Which means we’ve got the worst of both worlds: huge government and high costs.”
Then he adds,
“This is where a “serious conversation” on health-care costs would start—with what has worked, and what we can learn from it. Instead, it’s where our conversation about health-care costs never quite goes.”
Good idea. Let’s have that conversation.
Let’s begin with the idea that private expenditures are voluntary. Mr. Klein seems to share the view that spending money on health care is bad, and the more we spend the worse it is. This has always been a puzzling attitude. I have never been sure what they would rather we spend the money on. Potato chips? Fancier houses? More stylish clothing?
If Mr. Klein were better informed about the OECD, he might have come across another graph they published—
As the graph shows, one of the unique characteristics of American health care is that we spend so little out-of-pocket as a percentage of total spending. Americans spend only 13% of our total health care spending directly out-of-pocket, as compared to an OECD average of 20%. We spend a smaller portion directly than Canadians (15%), the Swiss (31%), the Italians (20%), the Belgians (22%), the Australians (20%), the Japanese (17%) and many others. In fact, the only countries that spend less than we do are France (7%), Luxembourg (7%), and the Netherlands (8%).
Mr. Klein might then want to consider that part of the reason we have more health care inflation than many other countries is because we spend so little of it directly. Most Americans have no idea what their consumption decisions actually cost. It might come as a shock to Mr. Klein, but people tend to consume more when someone else is paying the bill.
We have remedies for that, but most critics of the US system seem to believe it is mean-spirited to expect people to pay a portion of what they consume—unless, of course, they live in some other country.
Good post, Greg.
Greg is focused on the right issue. There is not that much difference between public and private insurance. The real issue is third-party payment versus out-of-pocket payment. On that score, we are worse than most other developed countries — as the chart shows.
How can such an article be written without mention of what the State of Indiana has done with their state employees? In Mar 2010 Gov Daniels reported that >70% of the state employees had opted for high deductible plans with Health Savings Accounts by their own choice. The savings are so huge that this approach has the power to sunset medicare over time as the vast majority of inividuals would reach retirement with no need for it.
The current structure of low deductibles and copays is not really insurance at all but rather an unnecessary and wasteful third party prepayment scheme that only includes overuse while wrapping in all manner of crazy state mandated coverages from gym memberships to marriage counseling to massage to hair transplant. Much of the reported % of GDP spent on health care is way off the mark and quite debateable as to its relationship to healthcare at all.
A 1994 study by CATO’s Stan Leibowitz estimated the waste then caused by unnecessary third party payment, mainly in the form of overuse and associated administrative costs to be $333 Billion. Yes that was one third of one Trillion dollars! Yes that was 1994!
All this is why the left did not win on Obamacare. The right lost by not making the correct arguments or even realizing what works and promoting it squarely in the face of the left (Obama).
Since we are on one-variable explanations, note that out of pocket spending in Germany also is only 13% of total health spending. Yet Germany’s per capita health spending in PPP$s is less than half of the American level.
And what variable is different?
Hint: Look at the size of the pink bar segment.
Ha ha, love it when Uwe busts John. But serious John, if all non-gov spending was out of pocket by price conscious consumers, how would that reduce the gov spending?
Oh and that 7% os US GDP spent by the gov on health care –if administered by Brits or German or Swedish or Japanese bureaucrats would cover everyone, not just a few old and very poor people AND the OECD numbers done count government employees as part of gov spending they count them as private. Nor does it count gov subsidy of private insurance by tax exemption. So the share of gov spending of US care is actually higher.
So the US tax payer gets a terrible deal; they pay twice. Oh and US entrepreneurs running a small business like me have to spent untold amounts of time and money sorting out health insurance for employees.
Something else our foreign competitors don’t have to worry about.
Mr. Holt,
Don’t blame (or credit) John for this. I wrote it. So, let’s see here. You are saying if we forbade private health care spending tomorrow, all of that would simply disappear and Medicare would magically cover 100% of the population for what it currently spends? But I guess we would have to import some Brits to manage it for us? Or maybe you and Uwe would volunteer for the job.
I note what Prof. Reihnardt has written and also that the countries with the highest share of OOP spending are Greece and Mexico! On the other hand, those countries are not what Professors North, Wallis, & Weingast would call “open-access orders” and I’m sure that’s not where Mr. Scandlen wants us to go.
That is, in Greece or Mexico, the political class (a.k.a. ruling coalition) does not have to bribe the electorate with their own money, like it does in the U.S., Canada, or most European countries.
Nevertheless, Mr. Scandlen points us in the right direction, as always. There is a complicating factor that the chart cannot capture: The state or private payers dictate what is covered and what is out of pocket and also prices of much of the OOP spending.
For example, in Britain, the NHS “covers” dental (which explains British teeth) whereas in Canada it does not. In the U.S., private insurers continue to insist on fixing prices for OOP procedures, which adds bureaucracy but no value; while in France physicians can balance bill for some services (although I understand that the state has been increasing its control in this respect.)
Another educational chart would show OOP health spending in local currency as the numerator and wages in the denominator. That would really show skin in the game. Hmmm, maybe I should get onto it…..
Greg–sorry, its not clear who the author is (real blog don’t make that mistake, chortle chortle)
You are right in your interpretation. For what the US gov currently spends it could cover everyone at about a UK/european level. Of course that would require UK /European level of compensation for healthcare actors….
John has lots of work to do to make this all understandable, but teeth in the UK are basically private too. The teeth he remembers are (like mine) relatively old.
Somehow OOP spending with all its positeve consumptive and pricing-moving benefits (and some negatives) compares negatively to government spending? Sure, government spending feels like spending other people’s money, but is in fact spending your own money dimished by government waste, fraud and abuse.
A $14.5 trillion debtor nation with $30, $50 $70 trillions dollars in future unfunded liabilities simply can’t take on this kind of spending without drastically limiting access to care and imposing economy crushing tax increases in an environment where the American dollar/ government already face imminent default… for what purpose, equal access to lowest common denominator health care?
But, an oligopsony can compel lower payments to providers… which of course is the mode by which access to care declines.
As an ex-banker, I can tell you this institution is already an insolvent and represents a systemic risk to its stakeholders. Sorta like we all have a credit card that’s totally maxed out, and nobody will take that credit card anyway. Nirvana
Perhaps we’ll be able to say something about per capita health spending in other countries when OECD countries start counting health spending in the same way, have reliable pricing, and include productivity losses from waiting lists in their national cost accounting. Note that Canadian data, for example, does not include out-of-pocket costs for patients who pay cash in the U.S.
Until then, claims that the U.S. health care is more expensive are pretty unreliable.
Note the statistical sleight of hand here. Greg posts per capita numbers for all those countries — but omits noting that not all the capitas are covered in the United States.
The fact that the US spends all that money on only a bare majority of its people, leaving vast numbers of the working and under classes uncovered is why the US is behind most other advanced countries in child mortality and overall life expectancy.
This ship has lovely lifeboats — for the people who are allowed to get on the lifeboats.
David,
Nothing per capita about it. This is system-wide spending as a percentage of total national heath spending. Put the snark back in the closet.
BTW, child mortality and life expectancy has almost nothing to do with the health care system.
Greg,
Everybody, your “100%” is simply all of the capitas — and in the United States not all the capitas share in the bounty.
As for child mortality and life expectancy, I think you’re simply nuts. These are the two most basic measures of whether or not a health care system is working.
It is as plain as the nose on your face The US health case system works just as well as that silly rocket the US sent up in desperation in the weeks just afer Sputnik.
Just as with the space race, I expect the US to pull itself together eventually — but right now it’s just a mess on the launching pad, and Obamneycare is that sputtering rocket, nothing to do with health care, simply a welfare program for insurance companies.
-dlj.