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:

John C. Goodman
National Center for Policy Analysis