Have It Your Way

Yes, the U.S. health-care system is plagued by distorted prices and incentives. But American consumers are part of the problem.

Spencer Platt/Getty Images
Spencer Platt/Getty Images
Spencer Platt/Getty Images

Remember the old story about blind men describing an elephant? The U.S. debate over health-care costs is starting to sound a lot like it. Piecemeal comparisons of the world's health systems can't explain their differences. In the big picture, the person riding the elephant is the American consumer.

The United States spent 18 percent of its GDP on health in 2011 -- far more than the next major economy, the Netherlands, with 12 percent. Yet all that cash doesn't appear to buy better health; life expectancy in the United States is 81 for women and 76 for men, about the same as Cuba and worse than Costa Rica, Chile, and most wealthy countries around the world. The big question is why the United States doesn't get more for its money

There are obvious answers, and also some less obvious ones. As the New York Times pointed out recently, prices for care are higher in the United States. This stems in part from higher wages, but also from a situation where providers are monopolists at the time of treatment. Because health-insurance plans and geography tie patients to specific doctors, hospitals, and clinics, the fierce competition that is supposedly the strength of the American health-care system may be anything but.

Remember the old story about blind men describing an elephant? The U.S. debate over health-care costs is starting to sound a lot like it. Piecemeal comparisons of the world’s health systems can’t explain their differences. In the big picture, the person riding the elephant is the American consumer.

The United States spent 18 percent of its GDP on health in 2011 — far more than the next major economy, the Netherlands, with 12 percent. Yet all that cash doesn’t appear to buy better health; life expectancy in the United States is 81 for women and 76 for men, about the same as Cuba and worse than Costa Rica, Chile, and most wealthy countries around the world. The big question is why the United States doesn’t get more for its money

There are obvious answers, and also some less obvious ones. As the New York Times pointed out recently, prices for care are higher in the United States. This stems in part from higher wages, but also from a situation where providers are monopolists at the time of treatment. Because health-insurance plans and geography tie patients to specific doctors, hospitals, and clinics, the fierce competition that is supposedly the strength of the American health-care system may be anything but.

Price differences also reflect the intensity of care. American patients may receive more products and services to treat the same diagnosis than, say, a Korean or Spanish patient might. Sometimes these services may lead to better outcomes, and others times they may simply pad the bill.

The incentive to pad the bill is built into the American health-care system. For-profit providers of care want to extract every possible reimbursement from government and private health insurers. Non-profit providers aren’t much better; their executives are motivated by perks and the chance to build empires of hospitals and high-tech treatment centers. Both kinds of providers must soak paying patients to subsidize uninsured and underinsured people who receive free care.

Unlike doctors in many other countries, American doctors — even in emergency rooms — often work on a commission basis, colorfully referred to as "eat what you kill." Salaried doctors face pressure to boost reimbursements from hospital administrators. It’s understandable; the average doctor exiting medical school in 2012 carried about $146,000 in debt. These young physicians could look forward to four years earning a low salary as an intern and resident, followed by more middling wages as a fellow. They may hit their 30s before they can start paying down their debts, making big purchases like houses and cars especially onerous.

In the meantime, health insurers will be raking in the profits. From 1960 to 2010, the net cost of health insurance — the difference between premiums collected by insurers and the benefits they paid — went from 3.7 percent to 5.6 percent of health- care costs. Either their costs increased more quickly than those of the rest of the health sector, or they found lots of new ways to gouge consumers.

Clearly, prices and incentives in the American health-care system are out of whack. But the system is only one half of the equation. American consumers are the other half.

In 2010, roughly 84 percent of American health-care spending was on personal health care, with the rest coming from administration of insurance plans, public health, research, and capital investment. The shares spent on hospital care and physicians have stayed roughly constant since 1960. Over the same period, the share of "other professional services" doubled, "other health, residential, and personal care" tripled, and "home health care" shot up more than tenfold.

What’s actually in those categories? The answer is a lot of stuff that makes Americans happy: the ability to receive care at home rather than in a nursing home, non-physician services, non-traditional treatments, and other spending that Americans choose to pay for — even, when it’s not covered by insurance, at full price. We could spend the same cash on education, cars, or whatever the Germans and Japanese do with their money, but we don’t.

And there is one more thing Americans choose to pay for: being fat. More than a third of Americans are obese, about triple the rate in the Netherlands. Given the enormous health problems associated with obesity, the fact that our life expectancy is even close to the rest of the world’s wealthy countries may have something to do with the enormous amount of health care we buy. Think of it this way: An obese person can still finish close to an average runner in a race, assuming he pays for the best equipment, training, and performance-enhancing drugs.

That’s what we do. We like to have our cake, eat it, get diabetes, and still live into our 80s. Thanks to American health care, we can. It’s expensive, but it’s also our choice.

Daniel Altman is the owner of North Yard Analytics LLC, a sports data consulting firm, and an adjunct associate professor of economics at New York University’s Stern School of Business. Twitter: @altmandaniel

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