Monday December 2nd, 2013 informationliberation.com
U.S. Ranks Third Lowest of Eleven Countries on Health Care Spending (John R. Graham)
Every year, scholars from the Commonwealth Fund report the results of a survey of eleven developed countries, which questions thousands of residents about their health costs and access to health care. The media invariably cherry pick the report to produce headlines like this: "We pay more, wait longer than other countries".

Perhaps there is not much point in getting worked up about it. Every industrial democracy, including the United States, has a largely socialized health system. So, the headline might just as well be: "Differently socialized health systems impose different costs of socialism". However, the authors (and the media) insist that there is some clear blue sky that separates the United States from all other developed countries, which have "universal" health systems.

The authors attempt to describe the differences between various "universal" health systems, but this is not quite successful. It is unclear what they mean by "supplemental" private coverage. For example, they differentiate the British and Canadian health systems by claiming that Canada has supplemental private coverage. However, this is not quite accurate: Dental care and prescriptions are covered by the National Health Service in Britain, and by private insurers in most Canadian provinces. However, there is no supplemental hospital insurance in Canada, as there is in Britain through BUPA, for example. It is also clear from the media coverage that most reporters have little, if any, grasp of the differences between, for example, the Swiss health system and the German one.

Also, it is hard to determine whether national averages are very meaningful. Differences in spending and access within individual countries have come under increasing scrutiny. For example, the Dartmouth Atlas shows wide variance of Medicare spending, even within small regions (although the significance and causes of this variance are also under great dispute). Alternatively, we can look at childhood vaccinations. In Nebraska, 94.2 percent of infants receive recommended vaccinations, which puts it first among the states. Right next door, in Wyoming, the proportion is only 82.5 percent, which puts it in last place according to America's Health Rankings.

The survey's finding that causes the most shock and awe is health spending as a share of GDP. In the United States, health spending accounted for almost 18 percent of GDP in 2011. The Netherlands comes next, at just under 12 percent. In dollar figures, the United States spent $8,508 per capita, versus only $5,669 in Norway, the runner-up. This certainly invites us to question whether we are getting our money's worth. Free-market reforms, as John Goodman described in Priceless, are expected to reduce costs.

However, it's not clear that relatively high U.S. health spending is a burden on the nation. Table A, which uses data from the survey, shows that when we subtracted U.S. health spending from our Gross Domestic Product (GDP), we still had $39,560 per capita to spend on everything else we value. Only two countries, Norway and Switzerland, beat the United States on this measure. In the United Kingdom, for example, GDP per capita after health spending was only $32,818 in 2011 (adjusted for the cost of living). So, even though American health care is significantly more expensive than British health care, the average American enjoyed $6,742 more GDP after health spending than his British peer.

Indeed, there is good evidence that high GDP per capita is a cause of high health spending. David Cutler and Dan Ly have explained that physicians' incomes are a major factor driving up U.S. health spending. The average U.S. specialist earned an income of $230,000 (2010) versus $129,000 in twelve other developed countries.*

That is a dramatic difference, but it has little to do with health care per se. Rather, it is a specific case of the general distribution of labor income within a country. Overall, high-income earners in other developed countries earn significantly less than high-income earners in the United States. Cutler and Ly define "high earners" as those in the 95th to 99th percentile of the earnings distribution. He shows that U.S. specialists earn 37 percent more than the average of these U.S. high earners. However, their international peers earn 45 percent more than their high-earning non-physician peers.

When an American physician laments the state of medicine, and encourages her child to become a computer scientist or investment banker instead, this is what she is talking about. So, it is highly unlikely that we could reduce U.S. physicians' incomes, and maintain an adequate supply of them, without destroying the opportunity for Americans (and immigrants) to earn high incomes in lots of different fields.

Reducing the cost of U.S. health care is a worthy goal, but it needs to be achieved by reducing the role of government at home, not importing a different model of government intervention from abroad.

*Cutler, David M., and Dan P. Ly. 2011. "The (Paper)Work of Medicine: Understanding International Medical Costs." Journal of Economic Perspectives, 25(2): 11-13. It is unclear whether Cutler is reporting 2010 earnings in 2010 dollars or 2004 constant dollars.