We’ve been looking at the challenge of health in the very poorest parts of the world. I’m going to move all the way to the other end of the income spectrum, and look at the challenge of health in the upper income countries in the richest parts of the world. You’d say what is the challenge life expectancy is high and the healthcare system is technically very sophisticated.
And while in the poor countries we scramble and wrack our brains to figure out how to reach a level of $60 per person per year. In the high income countries, the spending is typically around $3,000 to $4,000 per person per year in the public budget and if one looks in the United States at public and private spending for help, it’s $8000 per person per year. What’s the problem? Well, the problem especially in the United States is $8,000 per person per year. The health system has become incredibly expensive. So expensive that it is a major burden on the economy.
A major burden on the budget. A major burden on poor people who are priced out of the health care market even in the rich countries. And especially among those rich countries in the United States, where we have high inequality of income and prices of health care completely out of sight. And, as we’ve seen earlier, a rather limited or tattered social safety net. So many people not covered by government programs. The puzzle I want to explore is a specific one to the United States. In one sense, why is the U.S. healthcare system so expensive? But it is a more general lesson about the role of the public and the private sector in healthcare provision. One of the reasons why the U.S. system is so expensive is that it is a privately oriented health delivery system. Well, something isn’t right about that from the point of view of the common insistence that the private sector is very efficient and the public sector is bureaucratized and very costly. In the United States, where health care is provided mostly by private sector providers, the costs are completely out of sight. And this is a purpose that I’d like to look into now to understand why that is because it teaches something more general. For health systems around the world, it helps us to understand what are the boundaries between public and private. And in general it helps us to overcome a presumption, among at least some people, that the free market is always the solution to one’s problems. Well, we don’t believe that at sustainable development because we see that the solutions to the challenges of sustainable development require the interaction and often the cooperation of government, business, civil, society and academia. But sometimes it’s argued naively. Let the markets do it and the problems will be solved. In the United States, while healthcare is by no means a free market commodity. It’s more market oriented than in just about any other high income country. And the results are peculiar, to say the least. Well, we should know right from the start that health isn’t exactly a normal market kind of commodity. For one reason, it’s a merit good. We want health to reach everybody. Once it’s a merit good, it’s quite different from a bot, a can of soda or a piece of furniture or a, a new kind of car. Those may be desirable goods to some people but they’re not merit goods in the sense that we would expect on a moral or ethical basis. Universal coverage of those commodities, they’re not a basic human right. So, we know that health starts out in a very specific situation, just as does education. We also know, therefore, that public provision of those services is important. If for no other reason than to help ensure that the poor, alongside the rich, are able to gain access to those merit goods. But the problem goes even deeper than that. Kenneth Arrow, the great Nobel Laureate economist, observed all the way back now fifty years ago indeed, that health could not really operate like a competitive market sector. Because there’s a fundamental problem. Patients do not know what’s best for them in general. There’s a huge asymmetry of information. And Kenneth Arrow noted that when there is such an asymmetry of information, it violates one of the basic assumptions of the free market economy. Or I should say the basic assumptions of why the free market economy works well, and that is full information of consumers as well as information of suppliers. What happens when only the suppliers have the information? You go in to your doctor, and your doctor says, you need such and such test. Generally, if you’re like me, say, you’ve got it, let’s go for it. Maybe you go online and you see a whole debate about this. But then you don’t know what to do. You ask for a second opinion or a third opinion. Somewhere you’re going to, most likely, listen to what the doctor says. In the United States, oddly enough, doctors own a lot of the imaging equipment for CAT scans or for x rays or for other equipment. They order a lot of tests. And there is inherently a problem. When there is a symmet, a symmetric information, a symmetry of information, and the supplier is the one that has the knowledge, and the consumer is the one that generally follows along. One can see that if the incentives are not done just right, one could get over use, over charging, over billing of consumers who are in the hands of their doctors. Moreover with health if you’re like me, you don’t want to play around and especially if somebody is very sick. You don’t start negotiating in the emergency room or in the in the coronary care unit. when, the doctor or the hospital says that something’s needed almost all of the time you say yes, please proceed. And this is at its core one of the fundamental barriers to simply organizing the health sector as a, a normal market activity. There are others health requires insurance because bad luck, a bad bout of disease it a person stricken with a a, a very costly ailment would not be able to pay out of pocket. So, people buy insurance in the United States or receive a public insurance in other countries. And with insurance markets there are many, many problems as well. One problem with insurance markets is if individuals know their health conditions but the insurance company doesn’t necessarily. Perhaps only the sick will register for insurance and if they’re asymptomatic they will sign on as needed. Healthy people won’t. The insurance companies will find that their burdens of disease are unexpectedly large. They’ll raise the fees. That will keep healthy people outside of the system. Only the sick or those who have the likelihood of becoming sick will be covered. And what can ensue is sometimes called an insurance stat spiral. Where a smaller and smaller, but sicker and sicker proportion of the population is faced with insurance. Prices soar for the insurance premia and the rest of the population opts out or simply rationed out of the market by the very high costs. Another aspect of the health system that I think is quite notable, is that it is a system. With a sick patient facing a complicated set of conditions, you want the generalists to be dealing with several specialists. You don’t want each specialist taking all the same tests again. Ih, you would like the doctors analyzing a case to be working in a systematic, cooperative way in which information is freely flowing throughout the system. Sometimes health care works like that. But very often it does not. If it’s not organized that way. If individual doctors have their individual practices. Then a private market economy can drive up the costs considerably. If the government reimburses private providers in particular ways that do not encourage the building of those systems it makes matters even worse. Well, now you’re looking at a graph where, that dotted black line at the top is the cost of spending in the United States per person. It’s soaring. Back in 1980 the average spending on health per person in the United States was about $1,000 per person. By the year 2009, $8,000 per person. And you can see, by far, the most expensive in the world. Norway, another rich country, comes next. But at a level much lower, say $5,500 per capita, roughly $2,500 per person less than in the United States. And in general, the rest of the countries are clustered around this lower level. Typical spending perhaps around $4,000 per person per year, outside of the U.S. half of the U.S. level. If you look at the next graph you see the spending now divided by national income because we’re looking at the share of health outlays as a percentage of income. And you can see that back in 1980 the United States was spending about 9% of its national income on health. By 2009, that had doubled to 18% of national income. Notice that back in 1980, all of the countries, including the U.S., were rather tightly clustered between 6 and 9% of national income. Since then, the U.S. has separated from the pack, becoming by far the most expensive health care system in the world. In general, health costs have been rising and health outlays as a share of national income have been increasing, but in other places not by anything close to the increase experienced in the United States. You can see that as of 2009, for most countries, the spending is on the order of about 10% of gross national product, not the 18% in the United States. Well, this is shown for the year 2011 in the next bar chart, again you see that the United States, all the way on the right, has the highest level of spending as a share of Gross Domestic Product. The next chart also, this set of columns by country, also for the year 2011, shows the United States as another kind of outlier. What this graph is showing is the proportion of the total spending. Say the U.S. $8,000 that comes from private spending, maybe the households buying health insurance, maybe the employer in the private sector paying for healthcare, maybe people paying out of pocket. As supposed to what government programs are funding. What you can see is that the private health outlays in the United States are a bit over half of the total spending. So a bit more than $4000 per person comes from private spending by the households, the employers and so forth. But in all of the rest of the high income countries this share of private spending is much less, or to put it the other way, the proportion of total health spending by government is much higher. In essence the U.S. runs a system that is partly public, partly private with an accent I would say on the private sector. Whereas most of the rest of the high income world runs essentially a public finance system, with a small private sector alongside. The U.S. is the only one that goes for a very big private sector and private spending, that accounts for more than half of the total. What’s the problem? The problem evidently is that the private sector in the U.S. in very high priced. And what essentially is at play is the observation that Kenneth Arrow made 50 years ago. This is not a very competitive sector. Price competition does not work very well. In fact, individual patients often have no idea of how the price they’re paying compares with the price paid by other patients. So much so, that hospitals themselves engage in what’s called price discrimination. Charging very different prices to different patients within the same hospital unit. Shocking actually, because there is no standard public price that applies for all. There is instead a very hard to understand negotiating process where the unwary U.S. health consumer spends a often far more than the hospital charges to other patients facing the very same kinds of treatments and with the very same kinds of conditions. The result is that hospitals get away with a lot. They are not competitive they price discriminate. The prices that they charge are indeed very very high and one can see this in a systematic comparison of U.S. costs with the cost in other high income countries. In the United States for example the if, if the U.S. cost of 30 commonly prescribed medicines is set at an index of one, then the cost in New Zealand is 0.34, one third of the U.S. cost. The cost in Australia 0.49, in other words one half of the U.S. costs of those medicines. In the Netherlands 0.45, in other words 45% or 45 cents on the dollar of what’s spent in the United States. If you look at the cost of a visit to a physician you can see that, while the cost of a physician paid for by a public sector program, $60 is comparable to what is paid for in other countries. The cost that’s paid for by a private payer out of pocket or a private insurance company is out of sight. It’s twice the amount paid for by the public payer. And it’s much more in general than paid for in most other countries. Well, condition after condition, intervention after intervention, the U.S. system is simply out of sight. If on average a hip replacement is for a private payer is $2,000 in the United States, it’s $4,000. And this high price is found in every aspect of the U.S. system. One can look at the spending for each patient discharged from a hospital, how much was spent on that patient? In the United States in 2009, it was $18,000 per hospital discharge. In France and Germany, less than a third of that all the way at the other end of this graph. In the average of the OECD that is the high income country group, one third of the discharge cost on average in the United States. U.S. doctors make far more than doctors do in other countries. Orthopedic physicians in the United States make $440,000 in 2008. In Germany, less than half of that $202,000. So we can see that, essentially, the U.S. system is remarkably expensive. Not because it’s delivering a, a huge range of things that other countries are not doing. Not because the outcomes are better, but because the unit cost of the interventions is simply out of sight. What are some of the causes of this? Well, you could say this is very specific to the U.S., though that’s an important economy, but I think that the lessons are more general. In the United States, some of the things keeping the high costs high are the limited supply of doctors, controlled by the American Medical Association itself, which works with the medical schools to determine the flow of new doctors. Market power, that is the lack of competition. A true price discrimination in the hospitals. A true highly concentrated ownership of major hositals in a region. By the conflict of interest of doctors who own their own diagnosticlaboratories and then prescribe heavily imaging for instance MRIs or CAT scans on equipment that they themselves own. We see drug pricing at levels far above what is priced in other countries often because of close tie ups between the doctors and the pharmaceutical companies. Enormously high administrative costs because in the U.S., in the private economy, each hospital perhaps, or each group of hospitals has its own insurance connectors. The systems of different kinds of payers, public and private don’t communicate very well with each other. Whereas in other countries, in many cases there’s one single payer the government, and the government may be at the provincial or the national level, pays all the health bills. And so the administrative costs of managing America’s more privately oriented system is very high. And now I’ll add one final huge dimension, political economy. The health sector in the United States is powerful. It is one of our four most powerful lobbies in the United States, just along side Wall Street, thefinancial markets number one, big oil number two health sector number three and the military industrial complex number four. Four giant, powerful lobbies in the United States that also helped to prevent remedial action on these issues. Now, one of the leading organizations in understanding the U.S. health system the Institute of Medicine of the U.S. National Academy of Sciences did a recent study. They found something extraordinary. That the waste, fraud and abuse in the system, the over billing the waste of resources the repeated tasks, the outright fraud, the high management costs amounted to 5% of U.S. national income. That’s astounding. 5% of of, of U.S. national income is with a $15 trillion annual economy nothing short of $750 billion dollars a year in waste. And when you put that into context, the U.S. is spending 18% of gross national product in health. And what the Institute of Medicine is suggesting is that maybe out of that 18%, it’s getting 13% of national income in real value. Well why does this system persist? Partly because of its history of having organized itself as having a private sector economy that is not effective and doesn’t obey the principles of free markets. But partly because of the power of the lobby. And if you look at total lobbying outlays according to various sectors, you find something quite astounding. Adding up all of the registered lobbying outlays between 1998 and 2012. While miscellaneous businesses abroad grab bag category comes number one in the list. Number two in the list is the health sector. More than $5 billion of lobbying by private health companies to Congress, telling congressmen and the President and others influenced by this, don’t regulate us, don’t force us to expose our price discrimination. Don’t regulate us as other countries do so that there’s one price that applies to all patients within a certain category. Don’t regulate the prices that pharmaceutical companies charge on their patent protected medicines and so forth. Don’t try to reduce administrative costs, those are our profits those are our earnings those are our employment, say the big health insurers. And they do this through mega-lobbying. They also do it through campaign financing, shown on the next page. It’s the fifth of the sectors from the top, in the amount of financing spent by the industry during the most recent campaign cycle, complete campaign cycle, of 2011 to 2012. The health sector contributed, and this is means people from health companies registered as they make campaign con, contributions, giving about 260 million dollars of campaign contributions. You can understand that this leads to some attentiveness of the politicians to the interest of this concentrated group, not necessarily to the interest of the taxpayers, or the citizens more generally. What are some of the reform options? Let me conclude with that. First, would be to move to a single payer system like Canada has. It’s not simply in the imagination it’s in the real world. And Canada’s health system is far lower cost than the United States, with very high quality. A second possibility is what’s called an All Payer system. Sure, money would come from private employers, from out of pocket, from private insurance but there would be one price paid, per condition or diagnostic category or per individual covered per year. Rather than price discrimination where the hospital or the health, private health provider tries to get as much as possible. And if the unwary consumer doesn’t realize it it fleeces the unwary consumer by imposing costs far higher and prices far higher than other patients are paying. A third possibility is even more transparency, a certain fee paid by government or by employers per patient per year, so it’s not on the basis of services rendered, not on the number of tests, not on the number of hospital visits. That, the provider would have to provide efficiently, and at low cost if they want to make a profit. And so, another possibility is what’s called capitation. That the insurance company or the government would provide one amount of money per year, rather than fee for service. Another aspect would be increased supply. To remove the ability of the American Medical Association to constrict narrowly the number of doctors and specialists that come online. And finally I would mention how technology can be the friend of lower costs. With information technology, smarter systems, patients monitoring their vital signs at home or telemetry where a patients information is automatically being read at a distance at low cost and the patient comes in for visits only when the indication is there. Or community health workers, as in the low income countries working in the high income countries to reach people in their communities, rather than waiting for mega disease costs in the hospitals themselves. Plenty of reform, plenty of way forward, partly changing the incentives, partly employing new technologies. Of course that kind of reform also depends on politics. If the lobbies get their way, you get inflated costs. If this is a system that is run for the public benefit, there is tremendous good that can be done to reach more people, improve health outcomes, and accomplish that, especially in the United States at considerably lower cost.