It's the Prices, Stupid: Why The United States Is So Different From Other Countries

Gerard F. Anderson, Uwe E. Reinhardt, Peter S. Hussey, Varduhi Petrosyan

Health Affairs. 2003;22(3) 

In This Article

Health Spending Versus Health Care Provision

To explore further how the observed differences in the percentage of GDP going to health care might affect volume, quality, and spending, it is important to distinguish between two distinct categories of resources that may go in opposite directions: (1) the allocation of real resources (human labor and other physical inputs); and (2) the allocation of financial claims on the country's GDP to the owners of these real resources.[25] The relationship between these two distinct resource flows manifests itself in the money prices paid for health services. Several important insights follow from this relationship.

First, the relationship between the financial resources that individuals pay to the providers of health care and the real resources these providers contribute to the process of health care may not be nearly as tight as some observers have proposed. Some health care providers have argued that every proposed cut in health care spending is a direct threat to the well-being of patients. As one of us (Reinhardt) has argued, spending on health care can also have a direct effect on the incomes of providers.[26] The question is whether increased spending results in more real resources devoted to patient care or higher incomes to providers.

Second, the distinction between financial and real resource flows in health care raises the fundamental question of what is meant by the "cost" of a country's health system.[27] Because labor and other productive inputs are allocated to health care rather than to the next most valuable productive enterprise, there is an "opportunity cost" associated with devoting more resources to health care. Alternatively, the "cost" of the health care system could be measured by health spending (that is, the percentage of GDP spent on health). If one ranked countries by the costliness of their health systems on each of these two cost measures, the two rankings might be very different. Consider, for example, that Country A might devote a larger fraction of its GDP to health care providers than does Country B but uses fewer real resources in its health system than does nation B. In other words, Country A spends more per capita on health care than Country B, and yet economists might rate Country A's health system less costly than Country B's because fewer actual resources are devoted to health care.

To explore this possibility at the empirical level, Mark Pauly sought to estimate the opportunity costs of the human labor represented by physicians, nurses, and other medical workers in a set of OECD countries for the year 1988.[28] Although the United States spent a far greater share of its GDP on health care than did the other OECD countries in 1988, Pauly found that in terms of the opportunity cost of real resource use, the U.S. health system ranked somewhere in the middle of the OECD cohort.

Victor Fuchs and James Hahn came to a similar conclusion.[29] They noted that expenditures on physician services in 1985 in U.S. dollar equivalents were $347 per capita in the United States but only $202 in Canada. Yet another comparison, by Pete Welch and colleagues, provides additional evidence of higher prices with lower utilization in the United States.[30] It must be emphasized, of course, that the data used by these researchers are many years in the past, which makes the case for replicating the analysis with more recent data. We also now have the advantage of having data on more countries.

As shown in Table 3 and Table 4 , in 2000 the United States had fewer physicians per 1,000 population, physician visits per capita, acute care beds per capita, hospital admissions per 1,000 population, and acute care days per capita than the median OECD country. These simple comparisons suggest that Americans are receiving fewer real resources than are people in the median OECD country. There are, however, other explanations. A more comprehensive approach would be to compare the actual progression of treatment for a set of tracer conditions in various countries.

A study by the McKinsey Global Institute followed that more in-depth approach. The research team, which was advised by a number of prominent health economists, based its analysis on four tracer diseases: diabetes, cholelithiasis (gall stones), breast cancer, and lung cancer.[31] Using PPP-adjusted U.S. dollars as the common yardstick, the McKinsey researchers found that in the study year of 1990 Americans spent about $1,000 (66 percent) more per capita on health care than Germans did. The researchers estimated that Americans paid 40 percent more per capita than Germans did but received 15 percent fewer real health care resources. A similar comparison revealed that the U.S. system used about 30 percent more inputs per capita than was used in the British system and spent about 75 percent more per capita on higher prices.[32]

The preceding analysis suggests the crucial role of prices as drivers of cross-national differences in health spending. As noted earlier, the prices paid for health care represent the generalized claims on its GDP that a country cedes to the providers of real health care resources. The magnitudes of these money transfers depend upon a whole host of factors, among them the relative bargaining power of the providers and those who pay them.

Even if, within each country, the markets for health care and the related markets for the labor and other inputs used in health care were perfectly competitive in the textbook sense, the money prices of identical health care goods or services or inputs would likely still vary among countries. It is so because neither the goods and services nor all of the inputs that produce them are perfectly mobile across countries. Unlike markets for electronics or financial securities, which are truly global, the markets for the health workforce (especially physicians) are still largely national and even local within countries. Furthermore, of course, most of the markets related to health care within localities do not satisfy the rigorous conditions of the textbook model of competition.[33] In health care, for example, one finds varying degrees of monopoly power on the sell side of the market and varying degrees of monopsony power on the buy side.

Monopoly power allows sellers to raise prices above those they would obtain in perfectly competitive markets. In the jargon of economics, they are thus able to earn "rents", defined as the excess of the prices actually received by sellers above the minimum prices the sellers would have to be paid to sell into the market. Countries differ in the degree to which they try to whittle away at the rent earned on the supply side through the creation of market power on the buy (monopsony) side of the market. A single-payer system would be called a "pure monopsony".

In the U.S. health system, for example, money flows from households to the providers of health care through a vast network of relatively uncoordinated pipes and capillaries of various sizes. Although the huge federal Medicare program and the federal-state Medicaid programs do possess some monopsonistic purchasing power, and large private insurers may enjoy some degree of monopsony power as well in some localities, the highly fragmented buy side of the U.S. health system is relatively weak by international standards. It is one factor, among others, that could explain the relatively high prices paid for health care and for health professionals in the United States.

In comparison, the government-controlled health systems of Canada, Europe, and Japan allocate considerably more market power to the buy side. In each of the Canadian provinces, for example, the health insurance plans operated by the provincial governments constitute pure monopsonies: They purchase (pay for) all of the health services that are covered by the provincial health plan and used by the province's residents.

Even a pure monopsonist, of course, is ultimately constrained by market forces on the supply side—that is, by the reservation (minimally acceptable) prices of the providers of health care below which they will not supply their goods or services. But within that limit, monopsonistic buyers enjoy enough market clout to drive down the prices paid for health care and health care inputs fairly close to those reservation prices. It can explain, for example, why Fuchs and Hahn found that "U.S. fees for procedures are more than three times as high as Canadian fees [and] the difference in fees for evaluation and management services is about 80 percent."[34]

Just what impact variations in the distribution of market power between the buy and the sell sides of health systems have on the quantity and quality of health care, and on overall economic welfare, is an exceedingly challenging question on which even economists are unlikely to agree. In the simple textbook model used to analyze monopsony, a firmis assumed to procure inputs in a market in which it has monopsony power and sell its output in a perfectly price-competitive market. It can then be shown that the firmwill hire too few inputs and produce too few units of output, relative to the welfare-maximizing levels that would obtain in the absence of monopsony.[35] If this theory is applied to health care, it must be amended to allow for the ease with which providers can alter not only the quantity of services offered, but also their quality. As Pauly writes in his previously cited study: "Monopsony actually reduces total welfare, since it reduces quantity or quality, so it actually is a negative-sum game—but the primary effect is to control medical spending by controlling providers' incomes.[36]

Monopsony power, however, does not necessarily trigger this negative welfare effect. If its exercise were confined strictly to capturing economic rents that would otherwise be earned by providers, then economic theory would not predict an inevitable reduction in the quantity or quality of health care. The effect might be merely to redistribute income from the providers of health care to the rest of society. Even then, however, it is possible that a monopsonistic payer might push this process too far and eventually trigger reductions in either the quantity or quality of health care, or both. Using monopsonistic payer systems in health care to procure just the mix of quantity and quality that is actually desired by the insured citizenry is a daunting task and not always achieved sucessfully in practice.

To complicate matters further, there is the problem of defining precisely what is meant by the elusive term quality in the context of health policy. If the use of monopsony power enables a country to make health care more readily accessible to all members of society or at least to more than would otherwise be possible then the citizens of that country might well give their health system a higher overall "quality" rating, even if the exercise of monopsony power reduced somewhat the clinical quality and the amenities that accompany clinical treatment. That possibility could explain, for example, why in cross-national surveys on the satisfaction of citizens with their health system, Canada and the European nations have consistently earned higher marks than has the U.S. system.[37] Another reason could well be that the monopsony power allocated by these systems to the payer side reduces the prices paid to providers for health care, thereby transfering wealth from these providers to the rest of society.

In 2000 the united states spent considerably more on health care than any other country, whether measured per capita or as a percentage of GDP. At the same time, most measures of aggregate utilization such as physician visits per capita and hospital days per capita were below the OECD median. Since spending is a product of both the goods and services used and their prices, this implies that much higher prices are paid in the United States than in other countries. But U.S. policymakers need to reflect on what Americans are getting for their greater health spending. They could conclude: It's the prices, stupid.

An earlier version of this work was presented at the Commonwealth Fund's international symposium, Reconciling Rising Health Care Costs and Getting Value for Money, 23-25 October 2002, in Washington, D.C.