Another Reason Why Accurate Comparison of Health System Costs in Different Countries Is Difficult
In order to compare health costs in different countries, expenditures must be converted into a common currency. In practice, this is a more difficult problem than many people think.
Here’s a graph from The Economist showing how the choice of exchange rate comparison can alter conclusions. The light blue line compares incomes in various countries using market exchange rates. The dark blue line compares incomes using purchasing power parity.
Market exchange rates are the price of one currency in terms of another when currencies are bought and sold on international markets. The demand and supply of international currencies is driven by the markets for internationally traded goods and by capital flows between countries.
But many of the goods and services that people consume never cross an international boundary. Purchasing power parity begins with the notion that in the long run exchange rates should adjust to equalize the price of the same basket of goods and services whether it is sold in Rome, Nairobi, or Tokyo. Define the basket of goods, price it in different countries, calculate the exchange rate that equalizes the prices, and use that exchange rate to compare costs across countries.
One of the more famous purchasing power parity indices is The Economist magazine’s Big Mac Index. The Big Mac is the only content of this goods and services basket (in India, where Big Macs are not sold, the chicken Maharaja Mac is substituted). In this 2012 post, the average Big Mac price in America was $4.20. The average Big Mac price in Switzerland was $6.81. Calculating Swiss franc/U.S. dollar rate that would equalize Big Mac prices leads to the conclusion that the franc to U.S. dollar market exchange rate is 62% higher than it should be. An up to date interactive Big Mac Index is here.
Most international health system cost comparisons use purchasing power parity. But the baskets of goods and services that they are based on vary. The Manhattan Institute has a chart from Chris Conover that compares the results for U.S. health care spending with the rest of the OECD using the GDP purchasing power parity used by the OECD with a different basket of goods that he terms health purchasing power parity.
Apples? Oranges? Bananas? This is why we should support one global currency. Sorry, I’ve been watching Alex Jones too much recently.
As an economist, I love the Big Mac index! I wish that I could use it to compare price levels throughout the U.S. as well.
Bad math aside, the U.S. still spends waaaaaaaaay too much on healthcare in comparison to the quality of care we receive.
Even accounting for this factor, one should bear in mind that in terms of the portion of our national GDP, compared to other OECD, the US health consumption is the highest. And yet, we don’t have a better health status to show for it.
I think Deepak brings up a good point, as it stands, 17% of our national consumption goes to health care, this is higher than most OECD. Despite this, we don’t have a higher health status. Now I know that the U.S. has more complexities to it than other OECD, but still, 17%, soon to be 20%, is a high number.
I agree that in the US we spend way too much money compared to the quality of care we receive. It’s not a just system.
I concur Harley!
Sure, measures like these are hard to accurately depict the reality of costs, but it is still obvious that cost of health care in the US is too high.
We get it, we get it. How do we fix it?
I don’t understand what this has to do with hamburgers at all.
Good point, James! I look forward to seeing how this crystallizes as a solution.
For those who are certain that international comparisons show that the U.S. spends too much on health care, how should the international comparisons account for waiting lists?
We learned about the Big Mac Index when I was in school. It’s not really an accurate indicator of purchasing power parity. Dining out is a luxury in some countries. Eating fast food is a down-market alternative to fine dining in others. Since the elasticity of demand for burgers consumed away from home varies from one country to the next, it probably over-estimates the cost in, say, France compared to the United States.
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Anything but admit the obvious. Forget exchange rates, simply look at percent GDP. We spend 18%, the next highest are in the 12% range. If you look at the past 20 or 30 years of wage and employee cost increases, wages are flat, employee costs are up. The employee cost increases all health care. If your wages are stagnant, blame the health care system. You want an exchange rate independent metric, forget the big mac index, compare the cost of a doctor’s visit in terms of average hourly wage. But that will only make our overpayment worse so the NCPA will never do that analysis.
It’s interesting to read all the comments that “we spend too much on health care compared to other countries.” Of all the talking points, this one has settled into conventional wisdom. I wonder how our spending compares to other countries in the areas of food, housing, transportation, shoes, education? Does anyone care? Do they even know? Is higher-than-average spending on any of those areas a good thing or a bad thing? Does our high health care spending mean we are starving to death? Homeless? Spending on higher education has been increasing at twice the rate of healthcare for many years Yet it doesn’t seem to be a crisis wirth talking about. Strange world.
Greg, I believe the reason healthcare is getting “the press” as it were is because it affects all of us. Higher education does not. Higher education costs much more money because the government keeps giving students money, so the universities and colleges know that they can charge more money.
Linda, excellent question. I also wonder how do they account for the pain and suffering patients endure while on a waiting list, not to mention lost days at work? Government doesn’t save costs so much as it shifts them, and in health care it shifts them on to the sickest patients.
Also, do you think they account for having a private or semi-private room versus being on a hospital ward after surgery? That also makes the cost of U.S. health care more expensive. All you ObamaCare supporters who would like to give up your private rooms and go on to a ward to save costs, raise your hands.
@diogenes:
Health spending/GDP is intimately related to the measurement discussed above, because the prices of all other goods and services which comprise GDP will differ, too. That is, the aggregate PPP GDP is comprised of PPPs of various components. [See, e.g. Graham, John R. (2000). Prescription Drug Prices in Canada and the United States—Part 2: Why the Difference? Public Policy Source No. 43. Vancouver, BC: The Fraser Institute]. We could easily turn around Mr. Conover’s analysis to reflect this.
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