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Why Does Health Care Cost So Much?
By and large, current efforts in Congress to enact health care reform are focused on expanding access to health insurance, not on containing health care costs. But cost is the motivation for much, if not most, of healthcare reform. It is helpful to understand why costs are so high and increasing at such a rate in the United States, what cost containment measures are being debated in Congress as part of health reform, and what other measures might help to control health care spending.
How Expensive is Health Care in the United States?The U.S. annually spends around 16% of its GDP on health care; the next highest− spending country is France, which spends 11% of GDP.(1) On a per capita basis, the U.S. annually spends more than $7,000 per person; Norway, the next highest−spending country, only spends $4,700. Between 1995 and 2005, the average annual increase in per capita health care expenditures in the United States was 3.8%; in Canada during the same period, it was only 3.2% and in Germany, only 1.8%.(2) If medical inflation continues at the same rate as it has over the last 10 years, the average annual premium for family insurance in 10 years will exceed $30,000.(3)
Why Does Health Care Cost So Much? The Mistaken ExplanationsThere are a number of reasons behind the high cost of health care in the U.S. Before we discuss them, let’s consider several flawed explanations.
AgingThe U.S. population is aging, and this is an important cause of the rising cost of health care. The Congressional Budget Office projects that between now and 2035, aging will account for the greatest share of health care inflation in the Medicare and Medicaid programs.(4) But other countries with lower health care spending have been aging much more rapidly; in the U.S., 12.6% of the population is over 65, while the figure in Europe is 16.7%.(5) The aging of the population explains why costs are rising, but not why costs in the U.S. are rising faster than in the rest of the world.
Per Capita GDPThe U.S. is a wealthy country, and it might be supposed that this helps explain why health care costs so much. But a number of countries with lower health care costs have higher per capita GDPs, and based on per capita GDP alone, the U.S. spends $2,500 more than it should on health care.(6)
Better OutcomesIs the high cost of care in the U.S. justified by the health of its citizens? In other words, although we spend more, do we get more in terms of health? The answer is complicated; the U.S. has better statistics for some health care services, such as cancer care, and we have shorter waiting times than many other countries. But we do not score that well on a number of parameters, including infant mortality, coordination of chronic care, life expectancy, and avoiding preventable mortality and morbidity.(7)
Medical Malpractice SystemIn 2004, the Congressional Budget Office (CBO) estimated that the entire cost of the malpractice system accounted for only about 2% of the overall costs of health care.(8) While malpractice crises, characterized chiefly by sudden, dramatic increases in malpractice insurance premiums, stress physicians and other health care providers, the economic impact on the health care system as a whole appears to be slight. To counter this, the American Medical Association and other medical organizations asserted that the CBO ignored the cost of “defensive medicine,” which accounted for as much as $120 billion a year in health care costs.(9) This contention was disputed on a number of grounds, not the least of which was that it was virtually impossible to determine what medical practices were “defensive.”
In October 2009, the CBO released a report that found that malpractice reforms would reduce health care spending by more than $40 billion over the next 10 years.(10) This is far lower than the figures for defensive medicine that had been put forward by organized medicine, and would save only about 1/10 of 1 percent of current annual health care expenditures. More importantly, the CBO report does not necessarily support the idea that malpractice reforms reduce defensive medicine, defined as practices that do not produce overall patient benefit. One of the three recent studies that the CBO relied on stated:
Our estimates do not imply that any change in spending was necessarily “defensive medicine.” To the extent that additional malpractice costs mean greater precautionary testing with some medical value, any additional procedures might be protective of patient health or valued regardless of their therapeutic properties. We did not find that higher malpractice liability costs were associated with reductions in total or disease−specific mortality. This evidence is clearly not sufficient to rule out a potential benefit from malpractice liability–induced medical spending, but there is also some evidence from other studies that the increases in use associated with malpractice liability costs could actually lead to harm.(11)
A second recent study was more unequivocal: “On the other side of the ledger, malpractice liability leads to modest reductions in patient mortality; the value of these more than likely exceeds the cost impacts of malpractice liability.”(12) (The third study did not assess the impact of reforms on patients’ health.)(13)
If aging, wealth, better outcomes, and malpractice costs do not explain the high cost of U.S. health care, what does?
(6) Comments have been made