Does the U.S. Spend More?

A new report from McKinsey claims that the United States spends $477 billion a year – $1,645 per person – more on health care than other OECD countries do, after adjusting for differences in income and wealth.  To make matters worse, we do not get better care.  Paul Krugman of the New York Times is going gaga over the report.

However, the study makes a fundamental economic error, surprising for McKinsey.  The real social cost of any good or service is not the amount of money spent on it.  It is the real resources used to produce it.  This is especially important in health care, where the suppression of market forces in every country makes cash flows an unreliable indicator of real resource use.

Surprisingly, there are fewer practicing physicians, nurses and acute care bed days per capita in the United States than the average OECD country.  We do use 54 percent more medical devices – defibrillators, pace makers, coronary stints, hip implants, knee implants, etc.  But our consumption of drugs is 20 percent lower than in other countries.  If health outcomes among developed countries are pretty much the same, the United States does not look so bad in terms of resources used to produce those outcomes.

In the McKinsey study, almost 60 percent of the higher U.S. cost of care stems from high prices paid for inputs.  However, in other developed countries, governments use their buying power to force providers to accept below-market reimbursement, just as Medicaid and Medicare do in the United States.  For instance, the income of a physician is 5.5 times that of the average worker in the United States, on average.  The ratio for Germany and Canada is 3.4 and 3.2 respectively.  The comparable ratio is 1.5 in Sweden and 1.4 in the United Kingdom.

Monopolistic buying power – however, does not lower the real social cost of health care; it shifts those costs.  A different way of achieving the same result would be to pay doctors market-determined fees and then impose a special tax on them, leaving their net income where it is today.  The virtue of this alternative is that it would be clearer that social costs have not been lowered; they have merely been shifted to the providers of care.

A few other economic errors in the McKinsey report are worth noting.  They treat the profit of for-profit hospitals as a cost not borne by public hospitals – as though capital used by government has no opportunity cost.  And they treat the taxes paid by for-profits as a cost not born by public hospitals – as though real social costs were affected by whom the government chooses to tax. 

I'll save the quality discussion for another day, but leave you with this thought.  If the United States performs far more knee replacements than other countries then one of two things must be true: either 1) we are increasing the quality of life for our seniors relative to seniors in other countries, or 2) we are subjecting our old folks to a lot of unnecessary (and painful) operations.

Read the full report

Comments (14)

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  1. Jason says:

    “The real social cost of any good or service is not the amount of money spent on it. It is the real resources used to produce it.”

    What about the opportunity cost of all the money pouring in to health care? I think that is the real social cost.

    Also, how much should doctors make? You think the market determines this well. But aren’t doctors given state-sanctioned monopolies on their trade in return for self-regulation? Do you think consumers can effectively bargain against this powerful supplier group? Doesn’t that government have a right to balance the power of the supply side with some organized demand side power?

  2. Anonymous says:

    The OECD SHA project suggests that comparisons of spending are tricky because national accounts vary in what they count as health spending.

    And there is evidence that outcomes are better in the U.S.–low birthweight babies have higher survival rates (note that the OECD is now putting an asterix on its infant mortality rate data), the elderly have lower rates of disability, and population blood pressure control is better. Not to mention the fact that there are no waiting lists in the U.S. and that the costs associated with them are typically not included in national measures of health care spending.

  3. Dave Heidorn says:

    "If health outcomes among developed countries are pretty much the same, the United States does not look so bad in terms of resources used to produce those outcomes." This is such unmitigated propaganda.

    Health outcomes are not pretty much the same. Ours compare more to struggling post-Iron Curtain countries. The real measure of the costs are the results. The results are worse for more money spent. I'd ask you to take me off your email list but it helps me keep in touch with the dark side of public policy. Aren't things screwed up enough that you have to keep hammering away at it? You remind me of the article written by a former health insurance industry lobbyist during the last go-around on this issue who, after fighting changes in the health care delivery system, found himself without a job and without any way to get health insurance with a cancer-stricken wife. He regretted his earlier work, to say the least. I hope that doesn't happen to you.

  4. Martin Gibson says:

    John, that is an outstanding blurb. Clear, concise, and with a point.

  5. Regina Herzlinger says:

    Great report

  6. Ashley Ridlon says:

    What concerns me most about your Health Alert is this statement: “If
    health outcomes among developed countries are pretty much the same, the United States does not look so bad in terms of resources used to produce those outcomes.” (unless that is a very hypothetical or wishful “IF”):

    I would recommend you look into where the U.S. actually ranks among OECD countries in terms of health outcomes. The World Health Organization and National Center for Health Statistics are good sources.

  7. Tom says:

    John, Great job!!

  8. Jan Collmer says:

    Hi John, Pls consider the "Trial Lawyer" effect on the cost and performance of American medicine. The OECDs don't have this to deal with.

  9. Mark Pauly says:

    Couldn’t agree more, and there are other McKinsey reports that say
    exactly that–it’s prices and wages, not real inputs, that account for
    the differences. I said this ten years ago in Health Affairs.

  10. Steve Reeder says:

    Hi John,

    I don’t think I believe the first paragraph and do I understand you to say that we should keep doctor income where it is today? Who is “we”. And why not let the free market just work? Maybe I have misinterpreted this 2nd paragraph. I hope so.

    And we do this by imposing a tax. Are we accepting that it is fair now, on the basis of what? Does someone in Washington continue to determine what the value of my service is.

    I don’t know about other specialties, but the British surgeons, per procedure, are paid 20 to 33 % more than US counterparts. and with less overhead.


  11. Nevena Petkova APSA Agency says:

    Hi Mr Goodman,
    It took me time to read and understand all that you have been kind to send me,so,in spite of my bad English I want to share my opinion:There is difference between both Medicare system -ours and yours,but althout human nessesseties are universal,it supoused to be the same .Becouse every thing has to return on the first generic idea,that created it.
    So, the medicare is common care for everyone,a help in time,doesn,t matter if he is able to pay for that.But he has to put in his share in that common actitity when he is health and do work.Such is the sence of the Medicare I gess.But so becouse novadeys the jobs are gone and more and more people live in a scarsity,that fundamental goal to the Medicare is seriouzly erosied.Money is less then ever, but the sick people are more and more at the same time.The both powers – centrofugal and centroipetal blocked the function and unsence everything.What is done is a big comprimise for a while, but it due for ever.

    Becouse of sudden economical changies a lot of people fall down and could never stand up again.IAs they lose their job they lose everything becouse the job ifor monthly salary is the very one source of money,that buys anything they need .Such way man exist according the Monetary order and the market -he change his labour for money and that is his place on the market .
    The main chalendge now is that workers exist but not and the jobs.But unemployment overtakes us on the middle of the life – when everyone has already taken some role – being son of the old parents or parent to the children -and all his life has basied on the job and the salary that he have had.
    That human crash is a couse of so many mental desease.
    So I think to help such people means to help them socialy – to return them to the life,they used to had.
    These people are vulnerable and fragill as children.They do not need pills,but attention.
    Taking the main perception that everybody person is valuable by something,it could be create some big centres,then they can create that they can to do best, learn that they want and do some research.Al they could be volunteers by interests.
    I had similar idea before – to gather unemployed people by proficiency to chech all about the privatization in their enterprises, also to get a lcomputer literacy and to learn good English for compenssation.I applyed on the available programm but they did not aprove my project at all.Money that drops for reducing poverty are apopriated still from the air.Fight to poverty realy is a fight against the poors.
    Yesterday I sow a colomn in a newspaper by side – it was written agenda -a 31 man suiside killed himself, a dauther killed her mother, a wife offered a her husband,s hmorder to the lover,2 man have been capt at the robery, and a man faund a just born healthy girl on the dirty floor of the common toylet.
    Voila ! That is what the life is realy.
    Ordinery Bulgarian get in dept and finaly sells his home to cover it.Many people hung on the trees or go into the sea .The newspapers said -A mentaly deseased man ended his life.That is enough to explane all.
    Probable there is no such state like Bulgaria there exist a casus PERSON WITHOUT INCOME by low and it is prescriped TO INSURES ITSELF ALONE. How way ad with what. Rest people – relatives are wthout income too, or have got so law income ,that are able to buy the single bread then to pay fees or taxes.
    So noone can help another.
    In these circomstanses and the emergency market would be stop developing.We are bad consumers.Bulgaria was get out of the number of the industrial states, according the globalization and the transition.Even Russia is out too.
    Our states were turned into emergency markets, becouse the West European states want to pull out of the unstable markets to the Middle East and to change them with ours, Eastern European counrtries.
    It is quite right, but they do not predicted that if we have not income working for salary, we can not buy their production.If they do not give money time to time for that purpose indeed.


  12. Jade Borg says:

    That’s pretty cool
    I would recommend you look into where the U.S. actually ranks among OECD countries in terms of health outcomes. The World Health Organization and National Center for Health Statistics are good sources.

    Jade Borg

  13. Guy Hazel says:

    The “free” model of healthcare provision in the UK’s NHS is struggling as there is not market forces to restrict demand for services. To the consumer all services are “free” and therefore demand always rises above provision.

  14. Yogi says:

    Bhatnagar provides the flioowlng quote from the Ramayana: “Rama was born on the Navami tithi of Shukla Paksha of Chaitra masa (9th day of the increasing phase of the moon in the lunar month of Chaitra). At that time, the nakshatra was Punarvasu, and Sun, Mars, Saturn, Jupiter and Venus were in Aries, Capricorn, Libra, Cancer and Pisces respectively. Lagna was Cancer and Jupiter & Moon were shining together. — Ramayana 1.18.8,9The conditions can be summarized as follows, according to Bhatnagar:1. Sun in Aries2. Saturn in Libra3. Jupiter in Cancer4. Venus in Pisces5. Mars in Capricorn6. Lunar month of Chaitra7. 9th day after New Moon (Navami Tithi, Shukla Paksh)8. Moon near Punarvasu Nakshatra (Pollux star in Gemini constellation)9. Cancer as Lagna (Cancer constellation rising in the east)10. Jupiter above the horizonAccording to the Planetarium software, it provides the flioowlng date: Sri Rama Navami 10th January 5114 BCE Birth Day of Rama, Observation at 12.30 p.m.Bhatnagar continues: “By using a powerful planetarium software, I found that the planetary positions mentioned in Ramayana for the date of birth of Lord Ram had occurred in the sky at around 12.30 p.m. of 10th January 5114 BC. It was the ninth day of the Shukla Paksh of Chaitra month too. Moving forward, after 25 years of the birth of Lord Ram, the position of planets in the sky tallies with their description in Ramayana. Again, on the amavasya (new moon) of the 10th month of the 13th year of exile the solar eclipse had indeed occurred and the particular arrangement of planets in the sky was visible. ( Date comes to 7th October, 5077 BC). Even the occurrence of subsequent two eclipses also tally with the respective description in Valmiki Ramayana. (Date of Hanuman’s meeting Sita at Lanka was 12th September, 5076 BC). In this manner the entire sequence of the planetary positions gets verified and all the dates can be precisely determined.”